Interest only vs Principal & Interest – Why working through the different considerations could add millions to your nest egg at retirement (Ep. 184)

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Market Updates

Pete kicks off this week’s market update circles in on the fact that the ‘top end of the market’ is the fastest falling segment. As he points out, it’s the highest 25% of property that is dropping in value the most. Generally in a downturn, it’s led by the more expensive properties.

Dave tackles the cyclical nature of all markets, specifically the lending markets. Banks are coming up with more creative ways to get loans approved for people. Policies enabling low documentation are starting to appear, and it proves that when it comes to lending policy, every lender is different.

Cate shares with the listeners the power of FOMO at the end of the year; even in a tougher market. The dwindling supply of stock is having an impact on the supply:demand ratio for buyers in the run-up to Christmas closure.

In this week’s episode, Dave, Cate and Pete take you through:

    1. Why is repayment strategy so important? Most people don’t spend much time working out the relevance of either P&I or IO for their long term strategy. The reality is that a well thought out decision is imperative to their long term strategy and the benefits aren’t just limited to cashflow, but tax deductions, choice and flexibility for future decisions.The damage that can be caused by those who don’t consider the benefits and risks associated with each. Cate weighs in to share that from the ATO’s point of view, some of these decisions are irreversible.
    2. Is it a good idea to pay down all of your debt? Not in the way many people do it! Dave talks about the beauty offset accounts and interest only loan repayments for stepping stone properties. The important question is: “is there a possibility my current home might become an investment property in the future?”
    3. Hold while you accumulate! Dave takes our listeners through the  key benefits and options for investors to be able to adopt this fantastic mantra.
    4. How do we optimise investment deductions? Dave takes down the APRA memory lane and points out the changing landscape we faced post-2015 as APRA aimed to reduce their balance of investment lending. Our interest only rate loan pricing changed over this period, forcing many to pay down principle. Dave’s revelation will be surprising for many; this was in fact a false economy, despite the higher rates. One key consideration hinges on tax benefits; something that should always be calculated in the cost-benefit equation.
    5. The amount of money we have in our offset/savings account is one of quite a few benefits of having a war chest. While there are so many tangible and financial benefits, peace of mind counts for so much. While paying interest only repayments may go against our natural inclination, and Cate concurs with Dave that discipline is essential when it comes to implanting this strategy.
    6. Which repayment strategy is RIGHT? “Our job is educate our clients so that they are empowered to make the decisions that are right for them” says Dave. He takes our listeners through the pros and cons of both, but reiterates that there is no right or wrong when it comes to the choice between P&I and interest only. However, (important tip!), Cate reminds listeners that redraw and offset are NOT the same.

Gold Nuggets

David Johnston, the ‘Property Planner’s Gold Nugget: Dave shares two valuable key things for our listeners to take away;

  1. Getting the repayment strategy right can help us retain property that may otherwise have required us to divest.
  2. Getting the repayment strategy right can also maximise our deductible debt long term, and in particular, for property that may not have originally served as an investment property.

Cate Bakos, the ‘Property Buyer’s Gold Nugget: Cate reminds listeners that sleeping well at night is most important. If an investor is so stressed that they chose to divest a good property, this outcome is worse than losing on tax deductions and savings flexibility.


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