New Strategy Saving Investors
Thousands Of Dollars!
That's right you could be saving or costing yourself thousands of dollars depending on one small decision.
The decision is whether you choose to go interest only (IO) or principle and interest (P&I) payments on your investment loan. Over the last 2 years we have seen IO loans become more expensive then the alternative P&I loans. While there is no consistent difference, the average difference across the BIG 4 banks is 0.49% (based on interest rates dated 9/11/2018). On a $500,000 loan that would be an additional $2,450 in interest cost per year for choosing to go IO rather than paying your loan down.
Not so long-ago accountants and brokers would generally recommend investors go IO on their investment debt to maximise their tax deduction, and use any surplus cash to direct toward non-deductible debt. But does this long term held view still hold water? In general terms the answer is a resounding NO!!!
Not when you are paying an extra half a percent to go IO. But the decision isn't always that easy. It depends on the difference between the interest only rate and investment rate, your home loan rate, your tax rate and your loan balances.
The below table shows the savings comparisons based on a $500,000 home and $500,000 investment loan. Interest rate on the home loan of 3.88% and an investment P&I loan of 4% compared to the investment IO loan of 4.49%. In each example you were better off by going P&I on both loans.
You will also note the savings varied significantly depending on your personal tax rate. We used the tax rate including the Medicare levy. So savings are based only on examples given.
The example also assumes that your repayments between the two scenarios are the same. If you decide to spend the surplus cashflow saved from going IO instead of paying it towards your home loan you will also be worse off.
Are you always better of going IO. The answer is no! Using the same scenario but changing the investment IO loan to 4.2% you would be worse off by $1,064 over the 10 years if you were on the top marginal tax rate of 47%.
If however you were on the tax rate of 39% you would continue to be better off by $1,305.
In all cases your own personal situation will differ, So if you want your own personal assessment feel free to give us a call. We can supply your own personal assessment that you can then take to your accountant for review.