Principal & Interest or Interest-only?
Understanding property finance 👉8

A question I get asked often is whether you should go with a principal and interest loan or an interest-only loan. While both loans have pros and cons, they are also best suited for different scenarios. With the P&I loan, you pay more from the start, but you begin paying the loan down sooner. With I/O you can save a bit of money in the beginning, but you don’t start to pay down your loan until much later.

The first thing to remember is that your investment property is tax deductible, meaning the interest charge is deductible. If you have a mortgage on your own home, it’s a personal liability and not tax deductible. If you have subsequent mortgages on your investment properties, they should be on I/O until the first mortgage is paid off. Why? Well, why would you pay down tax-deductible debts if you have a non-tax-deductible debt?

With investment properties, if they are always receiving rent, you can always afford to service the interest. As long as the bank will allow you to have I/O loans, you should take them. If you can afford to put extra money into those properties, avoid the temptation to take a P&I loan and rather bulk up your cash buffer in an offset account. When your cash buffer exceeds the deposit for a new property, then go acquire a new property. The real money here comes from capital growth – rather focus on that.

I should give a disclaimer here: everyone’s circumstances differ so you’ll need to go see a broker, a bank or a financial advisor to see what works best for you in your situation.

Stay tuned for more daily insights from Wealth Through Property.

~Daimien Patterson


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