Principal and Interest vs Interest Only – we have the best rate on both of these options I have ever offered in my 40 years in business. A listener, who is a client of mine, tunes into 4HI every Thursday at 6.35am to hear my Q&A and he has a question.
“You usually suggest that your clients fund their property portfolio with a principal and interest loan, but surely with current interest rates there is an argument for interest only?”
He is correct however I advocate principal and interest because of the human factor. As humans, we all have unlimited wants but limited means. In other words – no matter how much we earn, we usually find a way to spend it. By paying off our loans with principal and interest we are reducing our borrowings – in other words, it is a forced form of savings.
As far as the banks are concerned with Principal and Interest Only vs Interest Only they usually see an interest only loan as a higher risk than a person who wants to pay off their loan. They also usually charge a higher rate of interest for ‘interest only’ however, there is currently a window of opportunity where this is not the case.
Window of Opportunity
Occasionally a Bank will have a large deposit at a fixed rate for a fixed term. When this happens, they can, in turn, lend for a low fixed rate for a fixed term.
Available at this moment …
This is the best rate I have ever offered in 40 years – 3.99% interest only in arrears locked for 4 years.
Principal and Interest vs Interest Only
I can also offer 3.99% principal and interest locked for 4 years and once again this is the best rate I have ever offered.
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An Example
Here is an example of ‘interest only’ locked at 3.99% using a property at North Lakes instead of North Harbour or Stone Ridge in order to use more conservative figures.
What makes North Lakes more conservative?
With North Lakes almost completed, demand exceeds supply and the land is about $70,000 more expensive, but the rent is the same as North Harbour and Stone Ridge and there is no tax advantage on the cost of the land.
A real life example on both major tax brackets based on 10% deposit and interest only at 3.99%.
I will use Lot 481, Ravensbourne Crescent, North Lakes. The land cost is $299,850 and the build $269,700 for a total of $569,550. I will allow for a very conservative rent of $470 per week and also allow for a vacancy factor of 4 weeks per annum.
What would it cost someone in the $180k plus tax bracket to service the loan?
Nothing, they would actually enjoy a surplus of $70 per week.
What about the $80-$180k tax bracket. Again, nothing and a surplus of $36 per week.
To sum up, if a client wants to buy one of my executive homes in Brisbane on 10% deposit and interest only it costs them nothing to service the loan?
The same will usually apply to someone using equity and borrowing 100%.
If you have any questions about Principal and Interest vs Interest Only or would like to take advantage of our free, no obligation consultation please contact our office.
Read more articles like this? Visit the Property Investment Category on our blog.
Big news at Emerald Golf Course last week and is that Grant Morgan scored a ‘hole in one’ and is now $250 richer. I asked him had he ever had a hole in one before he said, “Mate, this is my fourth.” I asked what his handicap was and when he said ‘Zero’ then I realised he was the hubby of the lovely Toni who works in the pro-shop. 🙂
Steve Taylor
If you prefer to listen here is my radio interview on Emerald 4HI:
At the helm of Steve Taylor & Partners, Steve Taylor has been delivering expert advice and product knowledge to clients for over 30 years. Steve Taylor & Partners provide individuals, couples and families with the right strategies to create wealth and change their lives with solid bricks and mortar.
DISCLAIMER
Steve Taylor & Partners blog is opinion and not advice. Readers should seek their own professional advice on the subject being discussed. The figures stated in this article were accurate at the time of publication. For up to date figures, please contact our office.
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