IO loan or PI with lower rates?

IO or PI with lower rates?


Sometimes it is necessary to get a PI loan rather than an IO due to servicing issues or go PI to get a much lower rates. These days interest only loans generally higher than the rates on a PI loan with a number of banks.

So should you settle for an PI loan to qualify and/or save interest?

Lets look at a theoretical example.
Bank X
$500,000 loan, 80% LVR
Interest rate would be
A 3.99% variable principal and interest or
B 4.23% variable Interest only

repayments on A would be $2,384 per month
repayments on B would be $1,763 per month

The difference is about $621 per month or approx $7,452 per year.

However most of the difference is principal.

The difference with interest between A and B would approx $1360 in the first year.

So is it worth paying an extra $7,452 per year in repayments to save $1,360 in interest?

Remember each year the principal on the Investment property loan would be decreasing by around $7,400 per year. This means tax deductions are also decreasing. Interest on $74,00 at 5% = $370. At 35% average tax rate this would be approx $135 per year in less tax back in your pocket.

So it may be worth paying PI where the interest rate difference with IO is not too great.

I am not sure how accurate my figures are but it may be possible to get the lower rate and not to lose out tax wise. See next my next tax tip.

 

Tax Tip 46: Want to Pay IO on a PI loan? https://propertychat.com.au/community/threads/tax-tip-46-want-to-pay-io-on-a-pi-loan.4438/

 

On a plus side you would also feel to be "getting somewhere" with your Loan. Also the slight increase in equity position. Would the Banks find this approach more favourable under current Lending conditions? Missing out on $135 back in Tax seems a small sacrifice to make if you refinance every 5 years or so you can reinvest your paid down Principle into more assets.

 

Yes, it is not such a bad thing paying PI.

But it may not have to be as there is a way around it. You can have your cake and eat it too.

 

In this case, could you apply as P&I (if that's what gets you over the line) then swap to io after settlement?

 

If possible, but often changing to IO will be a reassessment and/or a change in rate.