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Interest Only on PPOR

Discussion in 'Real Estate' started by Sean, 20th Feb, 2006.

  1. Sean

    Sean Member

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    What are peoples thoughts on paying IO on your PPOR?
    I know of someone who has a >500k PPOR mortgage on which he pays the interest only. This frees up remaining income for school fees, kids sports,lifestyle etc.
    His justification - The property value in the end will easerly cover the mortgage when it is time to pay it and the family can have a less limited lifestyle now. My first thought was, "your crazy", but I can see the merrits.
     
  2. MrDarcy

    MrDarcy Well-Known Member

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    My $500k+ PPOR loan is IO. This way I control how much principal is paid back and when.

    If I don't have good cash flow (ie most of the time), then I just pay the interest. Come into some cash (NI distribution, IP sale etc), and then it gets paid in as lump sum.

    Also, I as tend to re-draw from PPOR for investments, these “new” loans are IO, the way they should be.

    I consider that for a thinking borrower, all loans should be IO, allowing control your of cash flow.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    With an average inflation rate of 3%, the loan decreases in real value by half every 24 years (if inflation averaged 4%, it would halve in value every 18 years).

    However, if your average growth rate over that period is less than the interest rate being paid on the loan, you could still be going backwards.
     
  4. Simon

    Simon Well-Known Member

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    My parents bought waterfront property in Sydney at Oyster Bay in the 70's for about $40K.

    Imagine if they had never paid the loan down?
     
  5. Leandro

    Leandro Well-Known Member

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    Wouldn't it be smarter to just rent a place for their PPOR and rent out the house they own. At least this way they can deduct the interest payments against their taxable income. :confused:
     
  6. Ol School Skata

    Ol School Skata Well-Known Member

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    Leandro,

    I guess looking at this from purely a numbers decision, I can understand a decision to rent and buy IP's instead of purchasing and living in it yourself. However a PPOR is more of an emotional decision than purely numbers driven. Things like being able to make improvements at your leisure, certainty that a landlord will not be giving you notice to move on when they decide to sell, not having to ring the propety manager for approval to put a hook in this wall etc all come into play.

    Personally, I have no problems with paying IO on my PPOR, provided i can still put on my investor's hat and be fairly certain it is a wise move. Frees up cashflow, allows me to pay off the loan (if i chose) with future dollars (worth less) rather than present dollars (worth more).

    Horses for courses.

    OSS
     
  7. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Simon,

    Well put! Sort of sums the whole argument up quite nicely... :D

    Cheers,
    Michael.
     
  8. Leandro

    Leandro Well-Known Member

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    Im not sure i understand?

    Are you saying that if they only paid interest on the 40K property in todays dollars that would not amount to much?
     
  9. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Sorry Leandro,

    That place would be worth millions today. How dissappointed do you think they'd be if they were still paying interest only on a $40K loan for that house?

    I'd suggest they'd be laughing all the way to the bank...

    Interest only on a PPOR can work too.

    Cheers,
    Michael.
     
  10. Mark

    Mark Member

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    I think Michael and Ol School Skata have answered the question. The fact that one can even get an interest only loan as a "home loan" tell us how the lending and investing world is changing.

    Investment orientated people, as those on this forum, should enjoy the flexibilty that an IO loan offers. Soon it will be the norm.

    Cheers
    Mark
     
  11. Simon

    Simon Well-Known Member

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    Of course there is nothing preventing you paying more into an offset account attached to the IO PPOR loan. A virtual P&I loan if you like.

    These funds can be used to buy an better PPOR thus preserving the full debt on the exPPOR. This is really useful if your PPOR is a stepping stone to your dream PPOR and the exPPOR is destined to eventually become an IP.

    God I hope that made sense to someone!
     
  12. Jacque

    Jacque Team InvestEd

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    I guess, in some cases, you could even compare paying IO on a PPOR to rent, in that the payments are less and remain static for the entire period (unless you choose to kick in with principal lump sum payments).
    The downside being, of course, as has been mentioned, that none of it tax-deductible. And there is a certain sense of satisfaction in having no non tax-deductible debt left. Emotion also plays a part in "paying off one's home", particularly here in Australia.
     
  13. perky

    perky Well-Known Member

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    Perfect sense Simon, you beat me to it.
    If I was starting out now, I would go Interest only and have an offset account - so the extra payments would go into that offset account and take that money away if I move (and keep the old PPOR as an IP).
     
  14. Glebe

    Glebe Well-Known Member

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    I think IO PPOR loans are fantastic. The flexibility is unmatched!

    However I'm not so keen on the idea of only making interest payments whilst spending your cash on lifestyle reasons. Better to have a large deductible debt rather than a non-deductible one.
     
  15. Coffee

    Coffee Member

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    Can someone point me to a bank site (link) with IO rate for my PPOR. Just had a quick check of a few bank sites & all i could find was I&P / Fixed rates ?

    Maybe i'm missing something here as i can't remember seeing a IO rate for peoples PPOR.

    Geoff
     
  16. Ol School Skata

    Ol School Skata Well-Known Member

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  17. Coffee

    Coffee Member

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    Many Thnx, Ol School Skata for the link.

    Geoff
     
  18. Ol School Skata

    Ol School Skata Well-Known Member

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    no drama.

    hope this has broadened your horizons

    OSS
     
  19. MrDarcy

    MrDarcy Well-Known Member

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    Make the application at your favourite lender, but for an IP :rolleyes: not PPOR. A sudden change of mind just after settlement and move in. Market rent helps the application with more income to service the loan too....
     
  20. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    ... or better yet - get a good mortgage broker and do it properly :p