Interest Only VS Principal And Interest Loan On Investment Property | Australian Property Investing

Most people choose the standard principal and interest loan over an interest-only loan repayment, but many don't fully understand the difference between the two.
There are two main parts to the repayment of a loan:
• Principal - the money you originally borrowed
• Interest - the money you pay to keep the loan.
This video covers THREE PROS & CONS of Interest Only Loans.
0:00 - Intro
1:00 - Interest Only Loan Preserves Cash
2:22 - You can Rollover your Interest Only Period
3:56 - You make Passive Income on Interest Only
4:38 - Interest Only Loans are higher on Interest Rate.
6:13 - In Interest Only you never actually pay off the Loan.
9:16 - Interest Only can affect your borrowing capacity.
10:12 - Conclusion
11:47 - Pointers
12:43 - Outro
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DISCLAIMER: No Legal, Financial & Taxation Advice
The Listener, Reader or Viewer acknowledges and agrees that:
• Any information provided by us is provided as general information and for general information purposes only;
• We have not taken the Listener, Reader or Viewers personal and financial circumstances into account when providing information;
• We must not and have not provided legal, financial or taxation advice to the Listener, Reader or Viewer;
• The information provided must be verified by the Listener, Reader or Viewer prior to the Listener, Reader or Viewer acting or relying on the information by an independent professional advisor including a legal, financial, taxation advisor and the Listener, Reader or Viewers accountant;
• The information may not be suitable or applicable to the Listener, Reader or Viewer's individual circumstances;
• We do not hold an Australian Financial Services Licence as defined by section 9 of the Corporations Act 2001 (Cth) and we are not authorised to provide financial services to the Listener, Reader or Viewer, and we have not provided financial services to the Listener, Reader or Viewer.
#PropertyInvestment #PassiveIncome #Australia #RealEstate

[@AusPropertyMasteryWithPK]

❤ JOIN THE COMMUNITY & GET FREE SUBURB TIPS + STRATEGIES 💡 Private Facebook Group With Over 40,000 Clients & Investors 👉 facebook.com/groups/passiveincomethroughproperty 💡 Top Ranked No "BS" Podcast On Spotify/ iTunes/ Google 👉 consultingbypk.com.au/podcast/

[@ericmuthuri9510]

Mate, you don’t allow BLACK AUSTRALIANS to join your Facebook group?? You paint yourself as a ‘nice guy’ while you actively discriminate against some Australians just because they’re are BLACK? Says a lot about who you truely are.

[@26pranavshinde]

This is the best debt explaining video I came across to the date. All this experts on KZbin leave you confused. But you were on point. Excited to watch more and learn from you

[@jyattard827]

About to buy my 3rd property, this video changed my whole perspective on my next purchase.

[@masterjaykay1]

Love to see some a video around buying structures, personal name, trusts, joint, company etc, thanks 👍🏻👍🏻

[@AusPropertyMasteryWithPK]

Cool :)

[@Em-sw2fu]

This will be helpful!!!!

[@varunpal2884]

Great Insights as always!

[@Xtbl6681]

Great video. You asked for suggestions. Do an episode on a real world case study of someone purchasing paying int only, then selling, etc... and must take Interest cost into account

[@seanstark7369]

Hi mate great video, I’d love for you to do one on loan structure, and what mistakes to avoid that will hinder you from acquiring more and more properties

[@irenef9422]

Definitely what I needed

[@funcool32]

You can also use the increase in rent to pay down your loan when you switch to P&I... the beauty of inflation. And if you accumulated enough excess cash flow, you can make extra payments on an IO loan to pay down the debt.

[@ashishdeshmukh6738]

Perfect bro Love from Germany ❤️

[@elitemotorcycledrivertraining]

Great info

[@pawool]

Brilliant!

[@handyandie-morethanjusthan1462]

Great video.

[@vishalbhatia9503]

Superb info 👍🏻

[@kirstend2967]

Best watched at 1.5 speed - cheers

[@fredsalfa]

You got 15K views so far! More than 10k that you thought you wouldn’t reach😊

[@tomymadhu]

Great Pk 👍🏻👍🏻

[@iantaylor4329]

One of the advantages you did not mention with an Interest Only Mortgage is the effect of Inflation. Inflation has risen in Australia from 100 in 2000 to 162.43 to 2020 This means for every $100,000 borrowed in 2000, this was only worth $67,721.48 in today's money by the end of 2020.

[@AusPropertyMasteryWithPK]

Thanks for mentioning this…. You are right! devaluation of debt.. what’s your view on inflation going forward?

[@iantaylor4329]

Inflation is a way the Government might decide to get out of their debt precipitated through Coronavirus. The Consumer Price Index in Australia for March was 117.9. The Consumer Price Index in June was 118.8. The Inflation rate from March to June has been 0.8%.

[@AusPropertyMasteryWithPK]

@@iantaylor4329 true

[@ashishdeshmukh6738]

Inflation is friend for property investors.

[@funcool32]

Great point!

[@JJ-mc8lu]

It does not matter any more which one. What matters more is there are no more reductions. This will kill the market as previous appreciations were directly linked to interest rate reductions from their highs of 17% in the late 80's.

[@parketus]

Also main pro of interest only is inflation, ie. pay your principal in the future with the same volume of money with less value.

[@albertovich9255]

Great vid, but cant you go principal to pay less interest while paying down the debt and then refinance after a couple years to put deposit on another property which is pretty much the same thing but you would save abit more going principal i think. let me know what you think

[@lilly78899]

Hi PK, this is very valuable and helpful information that will assist when I purchase/refinance. Can you please do an updated video on this topic? Have your opinions changed?

[@I_agree_with_you]

Brilliant

[@ravindrag6121]

Well explained. thanks

[@AusPropertyMasteryWithPK]

Cheers

[@mariebelsapin]

HI PK, can you please give me an advise which is better move, buy your first home as nvestment... or buying a unit to rent out... I qm currently renting at the moment, so not sure if I will buy a land and keep the until such time the property demand slow down..

[@oscarcollins-hennink5478]

Great video 👌🏻

[@AusPropertyMasteryWithPK]

🙏🏼

[@sganguly09]

Hi PK, very good video as usual… wanted to know more about fixed vs variable loans and also buying IP as a family trust or individual name….

[@AusPropertyMasteryWithPK]

Ok have you seen my video in that from about 8 months ago?

[@haywirekwek]

If we do P&I, is the chance of getting positively cashflow properties drop significantly? Meaning, perhaps we need to look for at least, maybe 6% yields to cover P&I? Or more? The idea of paying P&I seems good to me (maybe I'm wrong), but the idea of capital growth upwards and the principal debt getting paid downwards may increase the equity at a faster pace? There seem to be a small number of cashflow property investors on KZbin advocating this. Your thoughts?

[@tonehow6967]

Correct not 10k views but 12k so far😁...great easy to understand vid 👍

[@ashishdeshmukh6738]

Can you please start a series on HOW TO START PROPERTY DEVELOPMENT 1. Do we need to open a company or possible on personal name? If yes, which type of company? Real Estate Holding? How to sub divide to minimise the liability? 2. How to count numbers on property development? What all points one should consider? 3. How to create a nice partnership deal with builders? Any strategy which is win-win for both of us? 4. Which kind of mortgage we should look for? 5. Risk analysis on property development.

[@AusPropertyMasteryWithPK]

There’s a couple videos I’ve done on this :)

[@72abhishekbhardwaj]

Can you please make a video on comparison between its better to have positive gearing rental investment and build more mortgage limit or is it better to have negative gearing and save on income tax thru depreciation, loan interest repayment etc deductions??

[@InventureTechnology-sm2ky]

Hey Mate, For first home buyers- Are you saying pay the 30 year loan interest at the start and then start paying the actual loan? If you can answer with a figure that would be very much appreciated, Thank you thank you Jude

[@JohnWick-ph9lv]

Is granny flat is a good way to build positive cash flow and capital growth? Thanks

[@regisdallbrida6213]

great video, love your contents. Please do moro videos like this one, nobody teaches it. Thank you again.

[@AusPropertyMasteryWithPK]

Thank you!

[@rrrraj78]

How to buy and rent out an investment property , what are the best steps ?

[@varundaga6984]

Whats your recommendation now that the interest rate is rising?

[@frankytastec6814]

Hi PK , so what happens if your circumstances change at the end of a the IO period ? For eg maybe I have 2 kids or I move to a lower paying job ? Going to to P&I would not be affordable . What to you do in such a scenario?

[@AusPropertyMasteryWithPK]

Great point.. this is why we must buy within our limits and everyone has a different risk appetite. One option is if you think you income is about to become unstable refinance all your loans and extends out the IO period for as long as possible to give you 3-5 years as an example to get your finances in order..

[@cryzz4627]

Hey mate what did you mean by 22% leverage are you able to go into that ? Cheere

[@rajivgoes6]

Great video mate, do you reckon it good to go for a 3 year or a 5 year loan? Secondly if I want to purchase my next investment property within 24 months would banks be open to lend knowing that I have 100% of repayment left on my first investment property?

[@lakshanperera372]

What did you end up doing Rajiv?

[@zahidmohamed23]

Is it worth forgoing FHO Grants by buying Investment properties just to have that better serviceable?

[@nelbanks6976]

Thank you so much for this video, very informative. I’m onto my 5th investment property

[@AusPropertyMasteryWithPK]

Congrats!

[@peterfirmandi1172]

Isn't it the same if we are on interest only payment and all the profits from rental we accumulate them in offset account. By doing that we are building equity

[@Persistentdreamer91]

Would love to see a video recommending any economists, investors etc. that you value and any books and resources that have helped you on your journey 🙏

[@AusPropertyMasteryWithPK]

Have you seen my video on books and podcasts?

[@Persistentdreamer91]

No, but my Saturday night is now sorted ✔️ will watch thank you 🙏

[@AusPropertyMasteryWithPK]

@@Persistentdreamer91 haha let me know how you go

[@rcast3763]

Great video! Are you able to Draw equity on a Interest only loan on an Investment property? The Equity im referring to is the Value growth of the said Investment property.

[@AusPropertyMasteryWithPK]

Yep

[@rcast3763]

@@AusPropertyMasteryWithPK I heared and seen comments that you can't. Asked my broker, but no anwer yet. Cheers for the reply!

[@AusPropertyMasteryWithPK]

@@rcast3763 I’ve done it too many times to remember how many

[@saritaggn]

Can we pay off our debt in one go to bank ?

[@digitalnomad87]

Hi PK, if I have IO for construction period but later wanna refinance with another bank ( assuming the bank dont agree to extend it or if i get better deal with another bank) to PI or IO , dont I have to pay LMI every time i change bank? Assuming my LVR is more than 80 percent.

[@AusPropertyMasteryWithPK]

It’s best to ask a broker that question, sorry

[@digitalnomad87]

@@AusPropertyMasteryWithPK No worries PK, appreciate your reply.

[@dundadunda552]

Yes lmi is not portable

[@paulmichael3338]

I have a question! If you have investment property and also a mortgage on a property you live in. Is it a good idea to do interest only and use passive income to pay off the property you live in.?

[@lynettepettitt655]

Generally yes, as your principle home loan isn't tax deductible in any way. His advice for IO or P+I is based on property values increasing, and building a large portfolio. It also assumes people have a higher tolerance risk. It also benefits people in the highest tax brackets- higher earners with more capacity for borrowing more. Having IO on an investment property & P+I on your principle home is an advantage if you're wanting to clear debt asap, while having tax advantages. But you need a plan for when the IO period ends.

[@vishalsharma-vv4if]

Does interest only affect on tax benefits?

[@alexandre230]

Hi Pk I would like to start investing journey, I saw this video , can you please tell me, as a positive cashflow, that is adding to your income and is taxed or?

[@AusPropertyMasteryWithPK]

Yes positive cashflow mean it’s adds to your income so is taxed. There are ways to get positive cashflow that because of depreciation are negatively geared so then you aren’t taxed .. but you have to be careful you don’t get a house and land package

[@thegoldensnitch6312]

You didn’t mention income tax. If your strategy is positive cashflow do you need to pay 35% to the ATO or are there ways around that?

[@damienfrizzell9394]

negative gear it

[@bassmovementhq3742]

Hi PK you mentioned that going interest loan will slightly affect your borrowing capacity negatively. I thought that by going interest only you will be making significantly lower monthly repayments, therefore borrowing capacity should be better with IO as opposed to P&I ?

[@AusPropertyMasteryWithPK]

The banks see it differently

[@dundadunda552]

Banks will assess u on the remaining p& I period eg. If u took a 5yr in...u will be assessed for serviceability over 25 yrs and not 30vyrs.

[@mehdigharib4710]

Brilliant as always

[@AusPropertyMasteryWithPK]

Thanks man

[@devvylevvy3067]

hey PK how about structure for buying investment properties(Company/Discretionary Trusts etc) :))

[@AusPropertyMasteryWithPK]

On the list for future topics! 👍🏼

[@Nick-sd7um]

Ahhhh yes the Australian housing market. Amass a portfolio on interest only payments, rent out, market squeezes due to lack of supply, mortage likely gets partially inflated away and sell off properties as value goes up. Then comes the best part.. buying investment properties to slap in kaboodle kitchens, bunnings fixtures and flip for hundreds of thousands. Bit harder to do now with credit contracting and rates going higher.

[@swng907]

I submitted the FB request a few days ago but it hasn't been approved. Can u have a look? Thanks

[@bparitosh]

Is there an option to pay more than the set IO amount? Thanks

[@AusPropertyMasteryWithPK]

You can switch to PI

[@thiruvenkatanathanv7847]

Hello Gupta...will I be allowed to make repayment of principal on interest loan period

[@dundadunda552]

No..u will be penalised. Put it into an offset acct

[@yunusemreerkan6064]

Hi PK. If you purchased the IP with LMI, won't you need to repay LMI when you refinance with another lender?

[@AusPropertyMasteryWithPK]

Only if you need to refinance beyond 80% lvr again 👍🏼

[@yunusemreerkan6064]

@@AusPropertyMasteryWithPK considering 12% as the suggested max deposit rate to build a portfolio quickly, it's going to be a struggle to overcome this refinance issue.

[@AusPropertyMasteryWithPK]

@@yunusemreerkan6064 it will be important to wait for the growth in that case if wanting to refinance without paying LMI

[@yunusemreerkan6064]

@@AusPropertyMasteryWithPK ah exactly. I forgot to consider the growth ;) appreciate it PK..

[@christy1705]

Can a person go interest only loan and still make separate payments to principle only if they want to

[@AusPropertyMasteryWithPK]

The extra payments just go into the offset account and basically act as PI but with more liquidity

[@yousufkhan6403]

Dummy question, when you say positive cashflow does it mean net positive after mortgage + rates(council, water, strata etc.) or does it mean net positive after mortgage payment only?

[@AusPropertyMasteryWithPK]

Yes after all expenses!

[@elanweddings6804]

My understanding of Positive Cash flow is excess after paying your mortgage (In this case interest only). Other deductions (Interest on mortage + rates + strata fees + other fees) are negative gearing. Obvious you have to pay income tax on your positive cash flow.

[@ajayborce9573]

I have my first house on solo income. Then building another house with my partner which will be our house long term. I will be making my first home as investment. Whats your advice for getting more properties in future. Im using equity of first to fund the second house. How many times can i refinince to pull out more equity fron first house?

[@dundadunda552]

No limits as long a u are deemed by bank to afford the repayments at p&I term.

[@runswmily]

I’ve got a decent income but feel as if the markets slid out from under me. How do I get you to help me start?

[@AusPropertyMasteryWithPK]

This is how I help: consultingbypk.com.au/

[@andrewm3329]

I called the bank for io and they said I will be paying more pi once the io period ends. Can you explain?

[@elanweddings6804]

Say after 5 years of I/o period you will have 25 Years to pay down your entire mortgage which will increase your P+I/O repayment. Hence you can re-finance your mortgage to another bank for 30 years with 5 or more interest only period.

[@shamax2201]

Looks like you did get 10K views 🙂

[@AusPropertyMasteryWithPK]

🥳

[@officialspock]

Im still not confident to take IO, it affects your serviceability, your rate is much higher, you need to keep on renewing it every 5yrs (subject to lender approval) and then you will still revert back to PI eventually with much higher interest, I really dont understand the benefit of IO if you only gain positive casflow 😥

[@AusPropertyMasteryWithPK]

Ok, the benefit as mentioned is it preserves your cash so you can build a portfolio quick

[@officialspock]

@@AusPropertyMasteryWithPK thanks Pk

[@lionheart1727]

Spock is right here, what is really the impact of io to your serviceability? Most brokers are saying it negatively impact it

[@dundadunda552]

@LionHeart yes it reduces yr borrowing power vases on how the banks determine yr serviceability...as they do not include the IO period

[@alisikaleti3601]

PK - in a pickle atm. ive got the ppor plus 2 other investment with one lender all p&i - ip's PG in the middle of moving ip to another lender making it stand alone IO 5yrs. option to take out equity to have it under 80%lvr. can use this top up and buy something else under 300k. so servicing is right up there again if i take this option. what i want to know and do is have a 2mill buffer to buy my dream home in dream location. So in order to do this i would need to sell my current ppor? worth 1.2mil owing 560k. even if i do sell for 1.2mil itl give me say 600k deposit and a 1.4mill loan which is very heavy.

[@AusPropertyMasteryWithPK]

What’s your question?

[@alisikaleti4824]

It is advisable to sell PPOR + IP 1 now and have about $900k to put towards a dream home worth $1.5 to $1.7M (so the rest $$ will be need to be made up of a OO loan)?

[@alisikaleti4824]

Q2 - should I change both my positively geared IP’s to IO now for 5years or more?

[@AusPropertyMasteryWithPK]

@@alisikaleti4824 it’s a pretty complex questions depends on the data and growth prospects for you me existing locations etc.. many more things to consider

[@AusPropertyMasteryWithPK]

@@alisikaleti4824 once again this needs to be modelled for cashflows your borrowing capacity etc etc

[@yurav5109]

don't you agree that with the current increase in interest rates all these properties will not grow in price ,but could actually go down? and in given situation interest rates increase will continue for a while I would say until 2030, by which time you will own nothing and rent everything, as per WEF policy and Australia is surely frontrunner for this.

[@AusPropertyMasteryWithPK]

This is such a nuanced answer and please watch my last 10 videos to understand it

[@trueinfo402]

hi p.k. i am currently paying 7k/ month P+I TOTAL . WHO SHOULD I CONSULT FOR HONEST OPINION TO RE STRUCTURE MY PRESENT SITUATION . MY INTERST PART IS HUGE APPX 5500/MONTH ONLY ,I M REALLY STRESSED//

[@AusPropertyMasteryWithPK]

I would suggest a good tax accountant and broker

[@trueinfo402]

@@AusPropertyMasteryWithPK any suggestion pls ?

[@AusPropertyMasteryWithPK]

@@trueinfo402 I’ve done videos with one or two. Please search

[@rhysmeredith8917]

Hi Pk, what’s your thoughts on offset accounts and would you use them on your IP or your PPOR?

[@AusPropertyMasteryWithPK]

Totally!

[@peternguyen2533]

Would you have separate offset accounts for each investment property (comes at a cost) or do you have one offset for all investment properties? Of course the offset account only links to one loan so you don't get the offsetting benefit in your other loans...

[@AusPropertyMasteryWithPK]

@@peternguyen2533 the more you have the more flexibility you have to turn them off or on.. I have them in almost all.. How about you?

[@peternguyen2533]

Well I'm in the process of buying my 3rd property and am thinking if I need or not. When you say flexibility to turn on and off, what do you mean? What are the other pros? Since I've got 2 investments atm , having one offset is managble I think. If more, I think I would have more than one.

[@AusPropertyMasteryWithPK]

@@peternguyen2533 like if you decide to fix a loan, then at least you have another where to deploy your offset funds

[@ptlptl8272]

Interest Only is rubbish idea, I think you exaggerating it due lack to experience and knowledge

[@AusPropertyMasteryWithPK]

Thanks for your opinion. My experience is based on 3000 properties over 13 years. And my own $12m portfolio

[@nathaliedg7526]

Hey PK! Got a mortgage broker you would recommend? I bought my PPR last year, with a 2y fixed which will expire this December. Would love to turn this into a IP and get into the property market in brissy. The guideline I have read in a book (obviously not financial advise) is: Interest only variable loan on PPR 100% offset Line of credit Interest free cc Would I then go for another interest only on the brissy property? Or go P&I with sub-offset accounts? (As i think it would give me a bit more piece of mind to see the principal go down) Also! How to come up with your strategy? Current mindset is pretty much “the more the better” 😅😂 I prefer to only hold, never sell Then googled how much you would need as passive income to retire comfortably… which is + $500.000 ? Any tips on how to see a bit more clearer with this? New to the KZbin comments as well, so feel free to direct message me in your FB group Thanks heaps for taking the time to make the video and for reading this and any advise you might have for me Nathalie