Should you only use interest only loans when investing in property or are there benefits to principal and interest loans.
Speaker 1: So we’ll move on to another question. If you guys are watching live and you have questions, please check them in the chat and we’ll go through them. We’ve been running mostly with live questions, Ben.
Speaker 2: This is awesome considering we just jumped on and didn’t tell anyone.
Speaker 1: No. And we’ve got 10 people watching at the moment. Should all your investment properties be interest only loans. I’m going to rephrase that because we can’t offer mortgage advice, and just ask what you think about interest only loans as an investor?
Speaker 2: I read the most amazing little article a couple of days ago that was sent to me from somebody. This was really, really interesting to fit into this conversation. Up until six months ago I was the biggest fan for interest only loans ever.
I was all about the interest only and reducing my holding costs and using the extra money that I’d pay in principle to go buy more property or to repay debt on my own home. But this article that I just saw was basically looking at, because interest only loans increased so much.
In some instances interest only loans can cost you an extra 1% per year. No 1% on a 500K property can be literally $5000 per anum extra cost just by taking the interest only option.
It was probably 18 months ago personally, a lot of my loans that I’d bought from back in the day were starting to get out of the interest only period. I rolled them onto principle and interest.
I sat down with my accountant and he said paying principle is probably the worst thing you could do when you’ve got debt on your own home still. But I like to see the balance going down every year on each of the properties that I’m buying. Even thought it might not help my tax position or my position on my own home, it does make me feel comfortable and has reduced my overall lvl.
If the gap between interest only and principle and interest loans is so severe you’ve really got to be questioning, is it worth literally paying 5 or 10 or 15 grand per year out of your pocket when you don’t have to be just by not paying principle off? And the once that gap between principle and interest loans joins again, you can go interest only and there’s a benefit to doing that.
Speaker 1: That’s the thing. You’ve got to analyze, I’m paying extra interest to go interest only. What is the tax benefit that I’m getting by not paying off the principle and does that tax benefit actually outweigh the extra cost?
Speaker 2: I can tell you what the tax benefit is. If the tax benefit is 5 grand a year difference and you’re earning $80,000 a year and paying 30% tax, then the tax benefit is one and a half thousand dollars per year.
It still doesn’t make sense to someone that actually understandS the numbers. I’m going principle and interest because I can save a heap of money per year, particularly on the more expensive properties.
This is one of those things like just because interest only has been working for the last 10 years doesn’t mean that as new information and opportunity comes into the market place, your strategy needs to evolve and you need to take advantage of current opportunities.
I’ve got principle and interest loans at the moment still, which are 3.3%. When the same bank is offering those loans at the moment at 5%.
You can be significantly better than the market averages if you know what you’re doing and you’re prepared to question the bank that you’re working with and make them work for you just as much as you’re working for them.
Speaker 1: That’s a great way to think about it as well. It’s not like interest only over principle and interest. Let’s actually look at them for your particular situation and see which one’s going to work out better for you.
If you just blanket statement that to say interest only is better because it can improve your cash flow and you can put that money into an offset account and then use that money to buy other properties, therefore it’s better.
But, like the situation Ben was talking about, if interest only is going to cost you more, then is that really worth it? Probably not.
Speaker 2: It’s like a lot of our clients, as you know Ryan, own 3 to 5 or 10 properties. Imagine you were paying an extra 5 grand per year on 5 properties and your earning is a combined income 120 grand per year.
I wouldn’t walk past a 25 grand suitcase on the side of the street filled with cash and not pick it up if knew it had just been dropped there for me to pick it up.
Speaker 1: Why is this money being dropped on the road so you can pick up?
Speaker 2: Because, why would you leave that money hanging on your investment property, you know what I mean? It’s just as stupid to think about leaving 25 grand a year sitting out there as it is to think about it sitting in the gutter.
Speaker 1: It just sounds so dodgy.
Speaker 2: It sounds dicey, doesn’t it.
Speaker 1: Leave 25 grand out in a suitcase.
Speaker 2: But that’s what you’re leaving. You’re literally letting, on 5 properties, that money to sit there. Or one property, 5 grand. It’s your money whether you see it or not.
It’s physically your cash. I think Warren Buffet says that best. I remember seeing this interview with him and Bill Gates. They asked Bill Gates, “If you walked past 50 cents on the road, would you pick it up?”. And he’s like, “Probably not.
I’d step over it.” Warren’s like, “If Bill dropped that 50 cents out of his back pocket, I would have picked it up and not told him”. That’s the mindset. He’s the wealthiest man in the entire world. Don’t leave money on the table for no reason.
Speaker 1: Hey guys, I hope that you enjoyed the answer to this question, which came from my live Q&A episode with Ben on YouTube. We will be doing more of these in the future. If you want to check out Ben, then he is offering free strategy session to On Property listeners.
To find out more about that, go to onproperty.com.au/session and you can see all the details over there. That’s it for today. And until next time, stay positive.