My investment property has an interest only loan and the bank has just increased the rate quite a bit…the property is working as ok as it has negative gearing but should I change the loan to principal and interest to get a better rate?
If you don't want to maximise your cash flow and don't need to invest in another properties, you are better off paying principal and interest as it saves you interest and you pay your loan down with time building equity,
we can help you with an investment fixed for 2 years, principal and interest at 3.88%, you can have another split as variable for the offset account.
Please feel free to call me on 0414 545 643
Hope that helps.
That's a good question. By paying principal and interest, you'll get access to a lower interest rate which means that you are actually paying less out in actual dollars in terms of interest payments. However, you'll also reduce the tax deductions that you can deduct (as the result of you making a smaller loss on your property). Because the net loss you make on your property is basically the rent earned less any interest you pay (as well as all your other costs), if you reduce the interest you are required to pay, you'll also reduce the amount of any deduction you can claim on your tax.
Normally, the actual cash flow saving from reducing interest will be higher than any loss in tax deductions, because your tax paid is only a proportion of the profit or loss you're making.
If you want us to go through your specific scenario, we can work through the numbers for you and talk to you about your best options. If you'd like to do this, feel free to contact us through here, or you can chat to me live at mortgagedirect.com.au.
There is quite a large premium for interest only loans with a number of lenders now and it is likely to get worse as banks struggle to re-balance their loan books to meet APRA and ASIC requirements.
Whether interest only works for you depends very much on how much owner occupied debt you have and your ability to make the higher repayments of a P&I loan. Don't get caught up on negative gearing, it is always better to be making money than losing it?
Go and sit with an experienced finance broker who can map out the options available and the repayments required for each one.
Best of luck