Regulators and some advisors have recently been pushing people towards “principle & interest” (P & I) loans rather than “interest only” (I.O.) loans. The theory and logic is that with a P & I loan, the loan gets paid down, whereas with an IO loan it stays the same.
However, there is a lot more to consider. No-one pays much off a P & I loan during the first 10 years anyway, so the above theory is a bit superfluous. Additionally everyone will be earning much higher incomes 10 years down the track. The main thing is to painlessly own the asset, not to live under financial stress.
Look at the comparison:
Interest Only $400,000 @ 4.5% = $1500/month.
Principle & Interest $400,000 @ 4.5% over 25 years = $2,220/month.
That’s an extra $720/month on the P & I loan.
As Noel Whittaker always says “Business is a game and the winner is the person who holds the most growth assets the longest time”. No great financial success comes to people who merely hold one little asset (property). The good thing is that it’s so easy to own more than one asset.
The excess $720/month can be set aside to fund a deposit towards another property at a future comfortable time.
Also, how about this strategy?
That $720/month is more valuable than you might think. In fact it’s actually (depending on your tax rate) possibly $1,345 on which you have already paid $625 tax leaving $720 to “play with”.
It would be a smart strategy to salary sacrifice the whole $1,345 into your super fund and own some investments (properties) within that super fund. This way you have a lot more money working on your behalf.
Some of the advantages of this strategy is that you can grow your wealth in a strong tax shelter with absolute asset protection. You can grow your assets here unhindered by the usual taxation of personal income, even if you sell them. There is only 15% income tax within the super fund and capital gains tax is limited to 10% within the super fund. In practice even the 10% never applies because it is reduced by all the “free” tax deductions that accumulate such as the theoretical depreciation allowances.
Often in practice the capital gain tax within the super fund becomes zero. In any case, no capital gain tax applies unless you sell. After you actually retire no tax of any sort applies to your SMSF, whether you sell or not.
There are “1000 strategies” to benefit clients depending on their age and circumstances.
Canterbury Property Services are just a phone call, email or website enquiry away. We are ready when you are.