Pay off your mortgage Quickly

[SilverDJ]

Generally reducing the principal is the fastest way to pay off loan.

It's the only way to pay off your loan

Loans are simplest things ever to understand.
The more money you pay in, they less you will pay overall and the shorter the loan.
The less money you pay in, the more you will pay and the longer the loan.
And paying in up front when the loan in the biggest pays the most dividend.

 

[trew]

^^ Well there would be some interest saving even if not much, but if you pay $500 weekly it quickly gains momentum.

paying 500 per week is the same as paying 2166 per month - both woud achieve the same result.

that is a psychological trick that gets people to make an extra monthly payment over the year without feeling it
and if it works thats great, but it is paying extra that brings the loan down, not paying it more often

and not much has changed from 20 years ago - people were doing all these things in the past
if you were paying 15% interest you would try to find every way possible to brinv the loan down too

 

[G-Log]

It's the only way to pay off your loan

The thing I fail to understand is what people gain from taking out an interest only loan. This seems insane to me. What am I missing here?

 

[House]

It's the only way to pay off your loan

The thing I fail to understand is what people gain from taking out an interest only loan. This seems insane to me. What am I missing here?

For PPOR probably a little bit of extra cashflow. Eg New parents and the mother is staying at home for the next year or two and then plans to rejoin the workforce.

If the loan is for an investment then the interest is tax deductible. IO is more for investorsspeculators to help with cashflow and keep funds available for other opportunities.

 

[SilverDJ]

The thing I fail to understand is what people gain from taking out an interest only loan. This seems insane to me. What am I missing here?

That's for people who intend to flip the house in a few years time. No point paying off the interest then, as it is tax deductible, and the you can keep the cash for other stuff (or other houses you are trying to flip as well).

The thing with paying off your own home though is that it will always be effectively the base asset that you own. With investment places you can always sell them if things go wrong and you aren't out on the street, but you (usually) never want to sell the house you live in as you have to live in something.
So once you decide to buy your own house it pays to put every last cent into it, as it's the best guaranteed return you'll ever get on your money.

There are some that can make interest only loans on their own house work, like people who move frequently in a rising housing market. But if you don't move, or the market doesn't rise by 10% a year, you are better off paying off your mortgage.
The end game is you want to own assets, and the best way to do that is to pay them off.

 

[G-Log]

There are some that can make interest only loans on their own house work, like people who move frequently in a rising housing market. But if you don't move, or the market doesn't rise by 10% a year, you are better off paying off your mortgage.

I was thinking of Residential Interest Only Loans. Bearing in mind that interest rates are higher for interest only loans it sounds like a precarious way to enter into housing market.

 

[SilverDJ]

I was thinking of Residential Interest Only Loans. Bearing in mind that interest rates are higher for interest only loans it sounds like a precarious way to enter into housing market.

Like I said, unless you plan to flip it, and your plan is to continue to flip houses until you have enough money to own one, then it's dumb.

 

[mmm....shiney!]

It's the only way to pay off your loan

The thing I fail to understand is what people gain from taking out an interest only loan. This seems insane to me. What am I missing here?

With an IP in which you have a low LVR, you pay the interest only and bank the leftover funds (ie the rest of the rent) into an offset account or some other bank account. After the interest only period ends (say 7 years) you either pay off some of the principle, or more likely use these funds as a deposit on another IP. You don't have to have any intention to flip properties, it may be that you want to accumulate more in order to provide a passive income in your retirement.

 

[Agnostic]

The thing I fail to understand is what people gain from taking out an interest only loan. This seems insane to me. What am I missing here?

Its for the control of cashflow when owning an investment property rather than an owner-occupied property.

Capital is scarce and must be preserved whenever possible.

If an investor can find a property with a net cashflow similar to the cost of interest, then the investor can structure a cashflow neutral or even a positive cashflow investment. Such investments can in theory be replicated infinitely (of course there are limitations in real life).

However a principal and interest loan requires larger repayments which may make the investment cashflow negative. Such deals can only be replicated to the extent of the investor' spare cashflow from other sources.

And another utilisation of interest only is for anyone who owns a rental property and also has a home-loan for their owner-occupied property. Such a person would normally have an interest-only loan on their rental property loan, and direct all principal repayments towards reducing their non-deductible owner occupied home loan.

 

[House]

Who else has suggestions we can use to get it paid off sooner?

A few come to mind

- Ask your accountant to organize a PAYG variation. Could be an extra $70/wk into your offset.

- Have your wages paid directly into the offset and pay all bills and expenses with a 55 day interest free credit card. Pay it off on the 54th day.(One guy I know asked both his parents to put their wage into his offset and
then repaid them in full every month)

- Refinance to a Professional Package (not just for doctors, lawyers etc anymore). Reductions in IR can offset the annual fee so you come out on top.

 

[G-Log]

I usually don't pay too much attention to "The Daily Reckoning" newsletter but in light of this thread I thought this article was very pertinent to discussion:

"The Stock Market Says Housing is in Trouble"

--Meanwhile, the RBA says there is nothing to worry about, and that loan standards are good. But just a few days ago, bank regulator APRA released data showing that total bank exposure to residential mortgages was $1.19 trillion, of which an astounding $462 billion were interest-only loans.

GREG CANAVAN
Albert Park, Melbourne
Thursday, February 25th, 2016

Another article explaining in Fin review.

http://www.afr.com/news/economy/employment/uncovering-the-big-aussie-short-20160223-gn130w

The proportion of Interest Only (IO) residential loans is surprisingly and dangerously high

 

[G-Log]

(One guy I know asked both his parents to put their wage into his offset and
then repaid them in full every month).

Hey Buddy! Can you lend me your pay-packet?

 

[House]

I usually don't pay too much attention to "The Daily Reckoning" newsletter but in light of this thread I thought this article was very pertinent to discussion:

"The Stock Market Says Housing is in Trouble"

--Meanwhile, the RBA says there is nothing to worry about, and that loan standards are good. But just a few days ago, bank regulator APRA released data showing that total bank exposure to residential mortgages was $1.19 trillion, of which an astounding $462 billion were interest-only loans.

GREG CANAVAN
Albert Park, Melbourne
Thursday, February 25th, 2016

The proportion of Interest Only (IO) residential loans is surprisingly and dangerously high

You'd have to dig deeper and find out why 46% are IO, the figure needs to be broken down before you make worried assumptions. There's 1.2m Aussies with investment properties and believe the significant majority would be IO.

(One guy I know asked both his parents to put their wage into his offset and
then repaid them in full every month).

Hey Buddy! Can you lend me your pay-packet?

I don't work so unfortunately can't help you out. Otherwise I totally would

 

[G-Log]

I don't work so unfortunately can't help you out. Otherwise I totally would

I've given you a sarcastic THANKS

 

[JulieW]

Some very informative viewpoints here thanks folks.

Anywhere care to comment on putting an IP into an SMSF to reduce taxable income?

Pros and Cons?

 

[G-Log]

Anywhere care to comment on putting an IP into an SMSF to reduce taxable income?

Pros and Cons?

SMSFs are investing in properties and I suspect SMSF advisers are recommending IO loans. However if property values drop (as they are sure too soon) many SMSF are going to find their investments underwater.

 

[BuggedOut]

I couldn't think of a worse time to be considering an IO loan to buy a property in Australia.

 

[mmm....shiney!]

SMSFs are investing in properties and I suspect SMSF advisers are recommending IO loans. However if property values drop (as they are sure too soon) many SMSF are going to find their investments underwater.

That depends solely upon their LVR, and the quality of the property bought. You can't just buy a house/unit anywhere and just call it a potentially sound investment.

 

[SilverDJ]

Anywhere care to comment on putting an IP into an SMSF to reduce taxable income?

Con - You can't touch the money until you hit retirement.
Once you sign that IP asset over to your super fund, that's it, it's gone. You can't sell it and get the money and spend it whenever you want, and you can't use that asset to borrow more money personally.
My account keeps telling me to do it because it's tax advantageous come the end game (i.e. once you hit retirement), but apart from that, meh.

 

[Jislizard]

Some very informative viewpoints here thanks folks.

Anywhere care to comment on putting an IP into an SMSF to reduce taxable income?

Pros and Cons?

No idea on the tax implications but we have an IP in our SMSF.

The main benefit is that you can borrow money to purchase the IP within the SMSF, so you can spend more money than you have already set aside.

From what I could understand there is not so much point in having it negatively geared, ours will be positively geared within 8 years apparently.

We have an SMSF offset account attached to the IP Loan and we are salary sacrificing extra money into the SMSF offset (taxed at 15% rather than 24% I think???).

The flat is returning about 5-6%.

We can't put any more into the loan repayments to reduce them further because of the rules around limits etc.

The depreciation scale is working so there will be some tax minimisation from that and the mortgage repayments as well as the salary sacrificing (which reduces our take home pay)

It all seems like a big con and at any one time I only understand about 80% of what is going on.