Interest Only Loan

by Hassan Raza
(Australia)

Hi,


I currently own one investment property. I have tenants who pay rent, but I put extra in from my cashflow to meet the montly principal and interest payments.

Since this property is an investment and I am not planning to keep it long term. I was contemplating to change my loan to a interest only loan.

I currently negative gear and reclaim a fair bit in tax, but I am thinking by an interest only loan the rent will cover the payment and at the end I still will receive some income in the bank! Overall objective is capital gain after a few years.

What are your suggestions?

Thanks
Hassan

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Oct 02, 2015
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Good post NEW
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Apr 17, 2011
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Interest only should get you more return.
by: Elizabeth Elwell-Cook

Thanks for your interesting question, Hassan!

Obviously I don't know all your personal situation, so it's difficult to comment, but in general, an interest only (IO) loan can be a very effective way to make more money out of your property in the long term, for far less outlay.

Personally, I'm not a fan of negative gearing, because unless you have so many properties and investments that you NEED the tax break, you're limiting your ability to invest in more properties, or even to borrow more because your fixed expenses are higher. The banks don't like that much... especially in this climate.

An Interest Only Loan sounds like the way to go if you want to have some more cash in your pocket.

Also if it means that the entire investment is being paid for with Somebody Else's Money (the tenant's!), *and* you're getting something back out of it at the end of the month too, then I'd go for it!

Do, please, check with your own financial adviser, and do your own sums, before you go ahead and change your loan. Make sure that you're going to get more money out of the deal than you are currently getting as a tax break (and remember that Negative Gearing is only really DELAYING the tax until you sell, not avoiding it altogether)

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