How Interest Only vs Principal and Interest Affects Your Cash Flow

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Interest Only vs Principal and Interest loans can have a huge impact on your cash flow and can mean the difference between a property paying for itself and then some and you having to find money to keep the property afloat.

Resources Related To This Episode

Property Tools

On Property Membership

Treat Property Investing Like A Business

How Changes In Interest Rates Can Affect Cashflow

ING Mortgage Calculator

Compare Interest Rates

Transcription:

Having an interest only loan versus a principal and interest loan can have a serious impact on your cashflow and can mean the difference between the property paying for itself or you needing to find money to keep that property of float. So in this episode we’re going to be on really basic and looking at how principle and interest versus interest only can affect your cash flow. Hey, I’m Ryan from on-property dot com dot EU. I hope people invest in property and achieve financial freedom and cashflow is vital when it comes to investing in property. You can be in positive cashflow position where the property pays for itself and then some or a negatively geared position where you’re constantly paying money out of your pocket each week in order to keep those properties afloat and if you have to pay too much money out of your pocket than the whole tale of cards can come crumbling down.

And so I don’t want that to happen to you. I want you to be aware of how these different types of loans can affect your cash flow. So let’s jump into it. We’re going to be looking at this calculator from ing, which is a mortgage calculator. If you’re listening along on the podcast, then I will be talking through all these numbers, so don’t worry. You don’t need to watch the video, but what we’re going to do is start with a loan amount of $100,000. Now that is not a realistic loan amount to buy a property here in Australia, but what I like about using 100,000 dollars is we can see how this difference looks on a small amount and then it’s really easy to scale up from there. So we scale up to $500,000. We’re just five x, whatever our results are. If we scale up to a million dollar loan, then we just x whatever we’re looking at, but this can give us a really clear indication of the different.

So we’re going to be looking at a loan period of 25 years. We’re going to be looking at a loan amount of five percent, which is probably a bit high for today’s loan amounts, but I like to use five percent. We’re going to be looking at weekly repayment amounts because I like weekly because then you can compare, okay, how much extra weekly rent, what I need to be able to cover this extra cost, and then we’ve got principal and interest here so we can see on this $100,000 loan across 25 years at five percent per annum. We’re looking at $134 80 per week. Now we’re gonna jump over to property tools.com dot a u, which is the tool that I created myself in order to be able to quickly assess the cashflow of a property to see whether it’s going to be positive cashflow negative and by how much.

If you’re on, check that out. Go to property tools.com dot a u and you can sign up for it over there. So we’re going to put in a purchase price of $100,000. We won’t worry about the rental income at the moment. Interest rate of five percent and deposit. We’re going to put a zero percent just so we get that full loan amount here of $100,000. Now if we scroll down, we can see the interest cost here of $96 and fifteen cents per week. So we can say with interest only at five percent, $96 per week, we need to pay if we’re going mortgage, principal and interest, sorry, we’re looking at $134 80. So you’re looking at about a $38 difference between interest only there and principle and interest, so $38 per week extra that you would need to find to be able to pay the principle and interest off your property.

Now obviously that extra money is going to paying down your debt versus interest only where you’re not paying that money. You’re not paying down the debt at all. That’s why it’s called interest only. And so you do have to weigh up those different options as well. It’s not necessarily one is better than the other, they’re just different, but it is good to know how it affects the cashflow. Now let’s say let’s bump this up to $500,000, which is a more likely loan amount for a property in Australia. Um, across 25 years at five percent we can see that it’s about $674 per week when we’re doing principal and interest back in property tools here, let’s bump that one up to 500,000 as well. And we’ll see that the difference that makes. So we can see interest only at five percent on that $500,000, we’re paying about $480 per week.

Whereas principal and interest, we’re looking at about $674 per week. So nearly $200 extra per week. Now that we’ve gone from $100,000 up to $500,000. So as you can see, this becomes quite a significant amount. That’s $200 extra per week that you need to find either from rental income or you need to find out from your employment or other sources of income in order to be able to afford to pay the principal and interest loan on this property. Now let’s have a look at a property example. So I’ve found this property here in manly west in Brisbane for offers over $665,000. Okay. These are properties I find properties every single day and share them with my members. So if you want to say real positive cash flow properties like this one I sent out one every single day, go to on-property dot com, forward slash membership. And you can sign up to receive these properties if that’s something you’re interested in.

So 665,000 and it’s renting for eight, 10 per week. Pretty sure this is a dual income property here. So let’s go property tools again, we’ll reset the calculator and we’ll put in these details. So $665,000 purchase price renting for eight, 10 per week. We’re going to interest rate of five percent weekly cashflow before tax is estimated at around 120 $627. Okay, so we’re looking at a property that’s likely to be positive cashflow. Obviously if we were going to invest we will need to go through and adjust property manager fees, expect vacancy, repairs, insurance, etc. Uh, to get a more accurate, but this is giving us a rough idea of what the cashflow is going to be and we’re looking at $126 and sixty seven cents. Alright well also got a. AssUming we have a 20 percent deposit, our loan is going to be $532,000. So let’s go to this mortgage calculator again, $532,000 and we can see the principle and interest repayments per week.

A $717 per week versus interest only, which are $511 per week. So we’re looking at about an extra $206 per week that we will need to pay if we’re going to go interest only. So we’re looking at the positive cashflow, $126. And then we look at that extra money, $206. That means that we’re gonna need to find $80 per week by increasing the rent, by maybe reducing our expenses. Or we’re going to need to find that money out of our own pocket in order to pay that principle and interest loan. So you would go from interest only at five percent being in a position where the property pays for itself and throws off some extra money for you to. If you go principal and interest the property still, I think it would. I would still classify it as positive cashflow because I believe any money that you pay above your expenses is positive cash flow.

So if you go principal and interest, I believe the interest you pay, that is part of your expenses, but anything you’re paying off the loan, I would consider that positive cash flow that you’re choosing to use to pay down your loans. Some people see it differently. That’s what I believe because that extra money is building up your equity as your loan amount is decreasing. So I think you’re kind of reinvesting that to pay down the loan. That’s the way I see it, but it’s up to you. But fact of the matter is here, we’re looking at $80 per week that we would need to find. Assuming that these calculations are correct, which they’re not going to be completely accurate, so take this with a grain of salt and obviously do your own research if you’re looking to invest, but this is a great example of how property can, if it’s interest only can go to, you need to find money to keep this property float if you’re going to go principal and interest.

So it’s really something to consider. I can’t give mortgage advice, so this is definitely not personalized advice. You need to speak to a mortgage broker about what’s best for you. And let me just show you here. We’ve got this mortgage, I guess it’s showing us all these different [email protected]. Uh, if I say I’m an investor and we look at the interest rates, we can see a bunch of interest rates here. Three point eight, nine percent, three point nine percent, three point nine, nine, four point. Oh, eight, four point two one. So a bunch of interests options here that are below the five percent mark. And then we start going above the five percent into the six percent range. So we can see a bunch of different interest rates here that are lower than that five percent with the lowest being three point eight, nine and three point nine.

Now this is principal and interest. So let’s now choose interest only and when you’re going to see is that the lowest interest rate now was, which was three point eight, nine percent is now four point four, four percent, so nearly half a percent more than what we had at principal and interest. So then we’ve got four point five, five and then instantly jumps up to five point two percent. So you need to look at this and weigh up your options because at the moment it does look like in a lot of circumstances you’re going to get a better interest rate with principal and interest versus interest only. Now this is something you need to talk to a mortgage broker about because they can assess your personalized situation and see what’s best for you. But it’s not just principal and interest is better because you don’t have to pay the interest.

I mean, you don’t have to play the principal off the property, so improves cash flow. It’s not like that. You’re not comparing apples to apples here. It’s going to be a bit different because principal and interest loans might be less expensive in terms of the interest rate. Then your interest only, so then you’ve got to weigh up what’s the benefit of the low interest rate versus the disadvantage of not having as much cashflow to play with. So there’s a whole bunch of things to think about here, but as you can see, principal and interest versus interest only can hugely affect your cash flow. I recently did an episode with ben. I can’t remember which one it was actually, I think it was the video where we talked about treating property investing like a business, so I’ll leave the links to that in the description down below.

Or you can go to on-property dot com dot a u four slash 5:27 to check out that episode. But ben was saying once he purchases a property, once he secured it, got the best price, all of that sort of stuff, he then will consistently look at interest rates for that property, so maybe every year he will assess his property, look at current interest rates and look at opportunities to save money on interest so he’ll be in contact with his advisors looking to get the best interest rate possible. He was saying that he did this across his loans this year and was able to save himself around $30,000 per year by getting lower interest rates. So it’s not just interest only versus principal and interest. You’ve got to look at what is going to be best for you and obviously seeing a good mortgage broker can really help you in that process.

But I hope that this has been helpful to you guys to see that interest only first principle and interest can have a massive difference on the cashflow. So when you’re doing your cashflow assessments, you need to make sure you’re taking into account that extra costs of principal and interest. If that’s the way you’re going to go, or potentially the extra interest that you’re going to be paying, if you choose interest only and you have to pay a higher interest rate, so it’s really up to you what you do, you can check out property tools and the calculator over here to do some quick analysis on property. If you wAnt, you can find [email protected] dot a you, and if you haven’t seen it yet, go ahead and check out my video on how interest rates can affect positive cashflow. So if interest rates go up or go down, how does that affect your cashflow? Again, I’ll leave that in links down below or in the show notes at on-property dot com dot a u four slash 5:38 for today’s episode. Thanks so much for watching. Don’t forget to subscribe and until next time, stay positive.