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Interest only or variable

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Ellen | 29 Nov 2012, 04:58 PM Agree 0
We have two investment properties and are thinking of changing to interest only. Which is best as an investment strategy? Will going interest only give us more borrowing power as our equity is all but run out right now?
  • Eos Property | 29 Nov 2012, 09:21 PM Agree 0
    Two separate issues here - interest only will reduce your monthly repayments. In addition to this the principle component to your loan is not deductible so there are no tax advantages to P & I. Moving to interest only means you will be relying on capital growth to increase your equity levels - moving to interest only will work against you if increasing equity is your goal. Having said that most investors use an interest only strategy, particularly in the early years.

    It is impossible to answer which is the best strategy as there are so many variables and so much more to know to give any information of substance.
  • Daniel Shillito | 05 Apr 2013, 08:13 PM Agree 0
    Hi Ellen,

    As Eos property correctly points out - It's difficult to answer as there are many variables, and comments here should not be accepted as entirely appropriate or suitable to your specific needs.

    However, if we assume your goal is greater borrowing power (at the bank), then the following may be useful:

    1. Being interest only or principal plus interest does not generally matter, according to the lending policies of about 90% of banks - since they assume principal plus interest repayment amounts monthly, on every mortgage loan you have, when they calculate your capacity to borrow more.

    However there are 2 or 3 banks that will treat existing interest only loans as only requiring interest payment monthly, and hence they calculate a greater overall buying power for you.

    Therefore your future borrowing power, all other things being equal, can potentially be increased, via using interest only loans today.

    The lower the interest rate (at the lender you have for your current properties) the lower those repayments will appear.

    2. In order to borrow again, you not only need repayment capacity (improved above potentially by interest only loans at certain lenders) but of course you also need to bring some equity to the table when you find that next property. From where will your 5, 10 or 20% deposit for the new property come?

    Hopefully you have some savings or equity in existing property to contribute, in order to consider borrowing more.

    3. Your borrowing ability will also naturally depend on all your current income, bonuses, rental income of existing properties, other commitments like credit cards and personal loans, and your living expenses.

    Again, further insight cannot be provided without reviewing your overall situation. You need to ask yourselves, is another property right now, the appropriate strategy at this time of your life and with your goals in mind?

    All the best,
    Daniel
    daniel@aussiefpgroup.com
    Aussie Finance and Property

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