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Interest only vs Principal and Interest

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Jamz | 05 Aug 2013, 05:27 PM Agree 0
Hi All,

We would love to if you could provide us with some investment advise as we are very new to this.

This is our plan – it’s good to have plans in life even though these do not go by plan.

We just purchased a property as first home buyers with Offset facility and paying Principal and Interest on fortnightly basis.

The current property we bought will be subject to the re-zoning scheme from R20 to R40 sometimes next year. We are planning to subdivide this property and build a new 4x2 home and rent it out. As we all know to get this approved and to finish building and to rent it out, we need to give at least 6-18 month. So this idea would be ready in late 2015.

In the mean time we thought to buy another investment (a subdivision potential R40) next year, September 2014 and rent it out. After the above subdivision is completed in late 2015, we are planning to subdivide this investment and build a new home, which later will be our primary residence. So by 2016 we are planning to have primary home and 3 investment properties.

Our questions are: to purchase the next year’s investment property should we change our current mortgage repayments to interest only and put all the remainder of moneys to our offset account and use it for deposit?

Or keep paying the Principal and Interest build the equity and then use the equity as deposit to buy next year’s property?

And we expecting many of youse to tell us not to proceed with this and put all the money into the first property…

Thank you

Greatly appreciated
  • kiki | 06 Aug 2013, 02:03 PM Agree 0
    there is no real right nor wrong answer. I suggest you buy a investment property software (I use POSH)and input your information into the software.

    run several models and select the model that suits you situation. your objective is have enough cash readily available when you it.

    The banks will love you if that cash is not tied down.
  • Eos Property | 08 Aug 2013, 10:35 AM Agree 0
    Hi Jamz,

    Given your next property will become your home then I would be converting your existing loan to Interest Only and plough surplus cash into your offset account. When the time is right to buy your eventual home use the money that has built up in your offset account to fund the deposit on your new home.

    Much more tax effective way of doing things.

    N.B you will still need to be disciplined with your offset account.
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