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IO or P&I - First time buyer

Discussion in 'Real Estate' started by Buck, 31st Dec, 2007.

  1. Buck

    Buck New Member

    31st Dec, 2007
    Hi All,

    I'm new to Oz (3 months) and my wife and I have just offered on a unit that we would like to live in for three years before converting to an investment property and buying something larger for ourselves to act as a family home.

    This would be the ideal scenario otherwise we will have to sell to help us buy a larger place.

    My question is how best to finance the loan. We were going 50/50 IO/P&I but a friend suggested IO with 100% loan rather than 80% that we had planned as this will give us better tax deductions long term. Is this the case?

    Whatever we choose to do our goal is to save in the next three years for us to afford a larger property and we will need funds to do this - can we borrow against equity we have in the unit or are we best to have all our money in the offset account??

    Appreciate any thoughts ...

  2. samaka

    samaka Well-Known Member

    30th Sep, 2007
    An interest only loan will be more tax effective when the property is an investment - it won't make a difference while you are living in it.

    If you are going to be saving for your next house as well - then I suggest you go IO because all the payments you would be making against the principal on a P&I would be tied up in the equity in your house.

    With interest only you can save your next deposit in an offset account which will mean the deposit is always available, you're paying less interest each period (IO instead of P&I) and the more you have in the offset account the less interest you pay.

    Depending on your timeframe and other goals you could look at debt recycling and re-investing your equity build up in to income funds, etc, - but I'll leave that for the more advanced guys here.
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    As samaka said, definitely IO if you are going to be converting it to an IP at some point.

    I wouldn't go 100% loan myself - the LMI is too expensive: 80 - 90% max LVR I'd suggest ... you need to do the sums to work out whether it is worthwhile borrowing more.
  4. thinkbig

    thinkbig Member

    10th Sep, 2006
    Perth, WA
    Defninitely I/O in my opinion.

    an I/O loan with the surplus put into a 100% offset has the same net 'cost' as an P&I loan, only it leaves you in a much more flexible situation when you want to convert your now PPOR into a IP.