Should I stick to an interest only loan for an investment property?

Hi Adrian, I am often asked this question by my clients. The decision on whether to structure your investment loan as interest only should be based on your individual circumstances and I would normally advise my clients to talk to their accountant or financial advisor to determine the best strategy. If you do not have an advisor I can certainly put you in touch with someone who can analysis your situation and provide you with the righr advice.

Hi Adrien. No one size fits all answer to the question. If you are currently repaying a home loan (your owner occupied home) then I would advise you to leave the investment loan as I/O. Concentrate on paying your home loan off.
If you have paid off your own home than an alternative is to make use of an offset account attached to your investment loan. Put your surplus funds into the offset account as this saves you on the interest being charged.
Later, if you wish to purchase another investment property you can use the funds in the offset as a deposit.
A lot depends on what your future ambitions are in regard to building a property portfolio.
Good luck with that.

Hi Adrien,

Great question I will answer by covering on why you might choose interest only or principle & interest.
I would suggest interest only where cashflow is low and the extra cash required for principal & interest would be a significant drain. It is important to remember though that by paying interest only you are not creating any capital gain and as a result you will be relying on market capital growth.
If cashflow is not an issue then paying principle & interest can be great way of creating equity in the property that can take the place of capital growth.
This is often the case with some regional properties for example, where capital growth may be lower, higher returns can help create equity that in the longer term provides a similar growth to a property with lower cashflow but higher capital growth.

So what is right for you will depend on your circumstances and the property that you ultimately choose.

I hope this helps & happy to chat off line .

Kind regards
Rebccca A Mitchell

Whats your strategy with the investment? Did you buy it to hold long term, pay it off and live off the rents? Did you buy it to renovate increase value and sell? I think the answer to your question is clear after you answer yes or no to these ones. Paying IO is efficient. Paying off the capital isn't increasing its value it's only reducing debt (think about that). Only the Interest is tax deductible. If you are negative gearing then ask yourself this question. Is the capital value increasing. Every year at a faster rate than it's costing me to keep it (after allowing for tax benefit)? If the answer is no then I ask again, what's the strategy?

Hi Adrian. Generally the key factor is do you have owner occupied debt. If so, then from a tax view you would focus on paying off the O/O debt first. So in this situation I/O on an investment loan would potentially make sense.

I/O loans are currently penalised by some lenders being at a higher rate. I suggest looking at your options.

Regards Ariel

This has been the strategy for invest props for many years as it allows funds to be freed up for other purchases, hence holding more property in a rising market over 5-7 years. If you are in area of predicted low capital growth in the next 5 years, it may pay to switch to principle and interest to begin to pay down the loan and consolidate and reduce existing debt in uncertain times...

Has all your personal debt been diluted ....if so then put all surplus fund into an offset account so you can go again and draw out your surplus $$