Principal & Interest or Interest Only
To see which option will work best for your circumstances, first ask yourself these questions.
Do you currently own your home and does it have a mortgage?
It’s generally best use your disposable income first to reduce your mortgage.
If you’re purchasing an investment property and currently have a mortgage on your home, then it could be the right choice for you to do an interest only loan on your investment property and principle & interest repayments on your home property.
Instead of paying off the investment loan, pay the principal part of the investment loan towards your own home loan. This reduces the amount of interest you pay on your own home loan and will shorten the life of the loan.
This is a great scenario if you’re looking to pay out your home loan faster.
How do you keep out-of-pocket expenses to a minimum on an interest-only property?
I like the expression: ‘Cash flow is the key to investing’!
If you’re of the mindset that you want to pay off your investment loan quickly, then another option to consider would be interest only repayments with on offset account. This way, you keep your out of pocket expenses to a minimum but can direct the difference between the interest only and principal & interest repayment options into your offset account.
You have the benefit of building a cash reserve and the funds are easy to draw on from your offset account if you need them.
By doing this, if something changes along the way, you have your holding costs at an absolute minimum.
If interest rates decrease your holding costs will decrease, or you can keep repayments at the same level however, if interest rates increase, you already have a built-in buffer because of all the extra ‘repayments’ you’ve been making.
What if you can comfortably afford principal & interest repayments on your investment property?
Many people still have a difficult time understanding the idea of having interest only repayments.
What I learned early on is that, when investing in property, it’s all a numbers game.
I’m trying to invest in order to secure and build a future.
I want to invest with the minimum cost to myself per week, hold for a longest period of time I can, and secure as many assets as I can.
If you could comfortably afford the additional amount per week that one principal & interest investment property cost, then you have the means to grow your investment portfolio by investing in multiple properties and electing to go for interest only mortgages.
By educating yourself on all the ins and outs of investing, by carefully considering your numbers and cash flow and by designing a long term plan that outlines where you want to be and how you’re going to get there, you can get your money working for you in ways you never thought possible.