Should You Use An Interest Only Loan When Renovating A Property? (Ep229)

Should You Use An Interest Only Loan When Renovating A Property? (Ep229)

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When renovating a property it’s important
to choose the loan that best suits you. Should you use an interest only loan when renovating
a property or should you use a principle and interest loan? That’s what I’m going to be
talking about in today’s episode. Hey I’m Ryan from onproperty your daily dose
of education and inspiration and today I’m answering your questions and I got a question
from Glenny here and she is talking about renovations which we covered in the last episode.
We were talking about renovating to rent and how long a property can be off the market
for and she asked, “Will I borrow interest only with the option to pay more off when
the rent starts coming in?” what I’m going to do is expand on this question, do it on
more broader terms cause obviously I’m not a mortgage broker so I can’t give lending
advice but I can give general education around mortgages and enlighten you as to what a lot
of other investors do. So when purchasing a property with the sole
intention to renovate it to sell; it’s probably a little bit of a different story to what
Glenny is talking about which is renovating to rent, but let’s cover that first. I am
imagining a lot of people watching this video are looking at renovating a property then
go ahead and sell it or get it revalued to borrow more equity from it. When looking at
interest only this situation one of the major benefits that you have is that you have less
monthly expenses while the property is being renovated. Because you are renovating the
property there is going to be no one in that property renting it so every expense that
you have you’re going to be paying for yourself. This includes the mortgage on the property.
If you intend to flip that property and sell it quickly is there much point paying down
small portions of the mortgage on the property if it’s going to increase your monthly expenses
for that time. It really depends on how much money you think you’re actually going to save
by putting extra portions onto the loan so you not paying the 5% interest or 7% or whatever
it may be. Is it actually worth putting that extra cash flow into that or would that cash
flow be better spent somewhere else to increase your profitability or basically to keep your
liquids so that you could actually afford to keep the property going. So one of the
major benefits of interest only is that it minimizes your cash flow requirements for
the mortgage and of course in the first early months of paying a mortgage even if you go
principle and interest over 25 years or 20 years the amount of money you’re actually
going to pay off that loan by going principle or interest in just the first few months when
you’re renovating it is going to be pretty small. So you do need to access whether or
not those extra repayments are actually going to be worth it.
Now if you are renovating the property to rent it out it could be a different situation
for you. Again you got the same situation as someone who is renting it out to sell it
in terms of cash flow. Because a principle and interest loan means you need to pay more
every single month so that means you’re obviously paying off some of the principle and over
time the amount you owe goes down and eventually the mortgage ceases to exist because you pay
it off. But that increase in payment is it actually going to be worth it to you when
you’re doing or do you actually need that cash flow. It’s a bit different when you’re
purchasing a property to rent it out because your end goal maybe just to hold that property
for the long term and eventually pay off the mortgage completely. Your decision whether
to go interest only or principle and interest will be determined as to what your cash flow
situation is like in the beginning what it’s going to be like once you renter in and where
you actually want to see yourself and where you want to see this property in 25 years
down the track. Now with interest only loans you can often
get an option of what’s called an offset account. Now if you don’t know what these are you can
simply Google what is an offset account and you can learn all about them but I do suggest
when setting up your loan you go through a mortgage broker so that they can get you the
right loan that has this offset account if you want it. If you want my mortgage broker
to get in contact with you go to onproperty.com.au/mortgage and just fill in your name and number and
my mortgage broker will give you a call and talk to you about your borrowing capacity
and your loans and all of that sort of stuff. But the benefit of having an offset account
is any money that you put in this offset account actually offsets your loans. So if you put
$1,000 in an offset account then that’s a $1,000 on your loan that you don’t need to
pay interest for that month if the money’s there for the full month.
Now what this means is that rather than making extra repayments onto the loan you can pay
your interest only but then you can make extra repayments into your offset account. Which
means the amount of interest that you have to pay is going down as you got more and more
money in this offset account. But the benefit of an offset account is that it gives investors
the flexibility to then take that money and do whatever they like with it. It’s your money,
you don’t need to apply to take it out of the bank. It’s just like having money in a
standard bank account and that just gives you the flexibility to take that money with
you to go on holidays or to use that money to reinvest because if you’re paying down
a property and you want to get that money back out chance are you’re going to have to
go through all the banks and the lenders systems to get an equity loan and to borrow against
that property. So having it in an offset account just means
you can access it easier. Now depending on who you are, your financial control and discipline
offset account doesn’t work for everyone cause not everyone is discipline enough to put money
in an offset account and not touch it. You know there is always the car motor just broke
down I need $1,000 to pay for that or I got a wedding in Italy in August and I need to
find some money to pay for that or something like that. So depending on who you are depending
on what your financial goals are will depend on whether you go with interest only or principle
and interest. For myself if I was to invest I would always
invest interest only with an offset account just because I love the idea of having less
cash flow requirements so if it took me longer to get a tenant or I couldn’t rent a property
for as much, I’m getting that I have less cash flow than I need to pay and so therefore
it keeps my head above water a little bit longer than if I was principle and interest.
It also helps you do positive cash flow faster because you don’t have the extra payments
that you’re making onto the mortgage and then you have the flexibility of an offset account.
What a lot of investors do is over time as rents tend to go up and as their properties
go up in value they might switch to principle and interest and then begin funnelling that
extra rent onto the mortgage to pay it off so eventually mortgage is completely paid
off and they don’t have to worry about paying interest at all which is where I think we
would all love to be, to have hundreds of properties all paid off and generating massive
incomes for us. So Glenny I hope that answers your question
as to whether or not you should go interest only or principle and interest when renovating
a property. Obviously this can’t be considered advice, it’s for general educational purposes
only. I talked about the benefits of doing interest only and the benefits of offset accounts
but that’s more factual advice than me saying actually go and do this because depending
on who you are and your financial situation, what your lending criteria is and stuff like
that, you need to get professional advice before making a decision like this. Again
I suggest you speak to a mortgage broker about these matters.
Alright if you have a question please email me [email protected] or go to onproperty.com.au/contact,
fill out the form, send me a question, I’ll make a video specifically to you and for you.
If you want access to my free report showing you 10 real positive cash flow properties
go to onproperty.com.au/free. So until tomorrow when the next episode comes out, stay positive.

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