Interest Only vs Principal & Interest – which is better?
There is much confusion and chatter at the moment around the subject of interest only loans vs principal and interest repayments, whether it be for an investment purpose or owner-occupied.
So, let’s try to simplify things.
Owner occupy- principal place of residence;
If you have purchased your home to live in, and you actually live there, it makes absolutely no sense whatsoever to have an interest only home loan, regardless what anybody else tells you! It really is that simple - there are no tax benefits and no applicable deductions whatsoever, so it simply does not make any sense! If you are wanting to make the repayments interest only purely to reduce your monthly repayments to provide extra cash flow for other purposes, then you should be considering consolidating everything into one facility and focus on reducing the overall debt, or selling and starting again. In some cases of hardship, where you have lost your job or have become ill, then yes, it makes sense to reduce monthly financial commitments until you get back on track. However, there are many mitigates available to cover borrowers for this, so any lender will immediately question why the borrower has not planned or made provisions for those type of events? Many borrowers make the common mistake of thinking they can rely on potential capital growth to save the day should something go wrong, and there are many cases where this strategy has unfortunately failed.
Many property investors like to take advantage of interest only loans as it keeps their loan balance at the same level for a number of years, thus providing the opportunity to fix the interest for the term of those years, as well as having better control of cash flow. This allows the borrower to easily calculate their tax deductions at the end of financial year. Effective if all you are wanting to do is maximise tax deductions, however, what if part of your strategy is to use some of the equity at a later date to buy another investment property? If you have paid nothing off the balance of the original loan, and are relying solely on capital growth, this may not work for you as you had hoped initially. If you decide to sell, the capital gain is still taxable, regardless of loan balance, so the deductions are often outweighed by the net capital gain, depending on when you decide to sell and the amount of net end capital gain. Your accountant can advise on the best strategy here for your own personal situation.
It is always advisable to speak to someone that is fully qualified and accredited in providing information relevant to your situation. So, if you would like further information on this, please call me on 0438 041 111 and I will be happy to discuss or call your financial advisor and seek their advice.
So, which is better, interest only or principal and interest?
The later always, whenever possible….
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci -0438 041 111