Interest only loans are popular among real
estate investors, today I’ve got to read a question where they ask are interest only
loans good for positively geared investment property, I’m Ryan McLean I’m from postivecashaustralia.com.au.
Today we are going to look at and answer this question.
One of the major benefits of interest only loan is that they help to minimize your expenses,
your biggest expense for an investment property, is highly likely to be your mortgage, and
by lowering the cost of your mortgage that could mean the difference between having a
positively geared property, and having a negatively geared property, it’s definitely something
to look at by paying interest only and not making any repayments on the principle of
the property that the amount you owe to the bank you can minimize your monthly expenses
quite significantly. Using an example of a $300,000 at a 6% interest
rate, if we were to go principle and interest for 25 years we would be paying approximately
$1932 per month. However if we were to go interest only and not pay any principle then
our monthly repayments would only be $1500 per month, that’s a difference of $432 per
month. If we break that down per week that’s over
$100,000 per week, your rent would have to go up at least $100 in order for you to cover
that extra cost, by minimizing your cost it could mean the difference between positively
geared and negatively geared as I said before. Another benefit of interest only loans is
that they help to maximize your tax deductions, many real estate’s mentors, many tax accountants,
advise investors to use interest only loans to because it means that maximizing their
tax deductions. The reason this occurs is because when you’re not paying down your investment
loan it means that the interest repayments are the same overtime.
Well as if you are paying down your investment loans slowly and slowly your interest charges
are going down which means you can’t claim that as tax, may investors and many financial
people will advise investors to instead of paying down the debt of investment property
which is a tax deductible debt, pay down the debt maybe your home which isn’t tax deductible
looking at that it can be a big plus for positive gearing.
Investment properties as well as negative gearing investment properties because by maximizing
your tax returns, maximizing your tax reductions you are actually maximizing your cash flow
as well because you could get a cash return or you could just not pay as much tax. Always
speak to a professional accountant when you are doing anything tax related this is for
educational purposes only. One thing to look at though is that interest
only loans don’t pay off your mortgage, that means that overtime let’s say you have a $300,000
mortgage, and you’ve got an interest only loan for five years, well in the end of five
years your mortgage will still be $300,000. If you want to pay off your mortgage eventually
you either have to going to move interest only to principle and interest and start paying
down the debt, or maybe you could sell one of your investment properties or sell something
and get large chunk of money and just pay down your debt quickly like that.
A lot of investors will choose to use interest only loans and then when it comes time to
retire, they might sell a couple of their properties and use the profits to pay off
completely the loans in the other properties even though they haven’t been paying down
slowly. Other investors will wait till cash flow goes up and the properties will and truly
positively give and then they decide they want to minimize their risk and so they start
paying down their debt. When it comes to interest only loan there
are some major benefits in terms of cash flow and tax deductions but in the end of the day
it really comes down to what you and your portfolio to look like what you want to achieve
and how quickly you want to pay down your debt.
For more videos podcasts and articles just like this one head over to the website positivecashflowaustralia.com.au
and I hope that you’ve enjoyed this information.