Interest Only loans - please explain!

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learning
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Joined: Sat Aug 04, 2012 8:09 pm

Interest Only loans - please explain!

Post by learning »

I am having a hard time getting a clear answer on my question.... In regards to IO loans, what happens after the inital term of IO when the repayments start - are the repayments higher that what they would have been if you had P&I from the start?
Also, any $$ in the offset account, does that reduce the P during the IO stage? So if you paid the P&I amount, then after 5 years you could dump that extra payment money onto the principal and be no worse off?

Here's an example. Loan of $290,000. Roughly IO repayments would be $330 pw I think and P&I would be $400. If IO was taken for 5 years, then how much are the repayments in year 6 and onwards, assuming the same interest rate? Are they going to be more than $400?

Also, Is the interest you paid in the first 5 years taken off the whole loan - for example, if you P&I loan would cost you $600,000 in interest over 30 years but you did IO for 5 years and paid $90,000, would you then only have to pay $510,000 when you started your P&I repayments in year 6, or would you be paying $690,000 in total?

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Hoa Hong
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Re: Interest Only loans - please explain!

Post by Hoa Hong »

Hi Learning,

On a Interest Only loan, you pay only the interest and your initial loan amount does not change. For example $100,000 at a 10% interest for 12 months will mean $10,000 of interest. You only pay $10,000 through out the year and your initial loan stays as is.

Once the Interest Only period is over the loan is calculated Interest PLUS the initial $100,000 divided over the whole term of the loan. The repayments will be higher as the remaining term of the loan is reduce therefore you have to pay it quicker. The offset account allows you to reduce the interest charged which makes lower repayments and gives you a head start in chipping away the original loan amount. You can use the repayment calculator to work out different scenarios

If you take 5 years IO then in the 6th year the repayments are higher as you only have 25 years now to pay the remaining loan off. The repayments will be higher then $400 per week.

The interest is not taken off the original loan this is the cost for borrowing this money and you pay this interest to the lender. After 5 years your loan will still be $600,000.

learning
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Joined: Sat Aug 04, 2012 8:09 pm

Re: Interest Only loans - please explain!

Post by learning »

If we pay extra on our IO loan into hte offset account, so after 5 years there would be enough $ to cover the P amounts we didnt pay, then would we be no worse off if we simply transfered that extra $ into the loan at 5 years?

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Hoa Hong
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Re: Interest Only loans - please explain!

Post by Hoa Hong »

Correct,

If you have the account as Interest Only for this period and make additional payments on top it will be the same as paying Principal & Interest during these 5 years.

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