P & I

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Mortgage rates are at an all-time low and this gets people thinking about their current lending. But rather than just trying to decide whether to fix or float (which is, of course, a very good question), some thought ought to be given to whether you should be on interest only or Principle & Interest.

The rule of thumb for most property investors is that your mortgages on rental properties should be interest only. There are a number of reasons for this:

1 – Interest only payments are smaller than P&I payments and therefore they help to protect your debt servicing ratio (the calculation that banks use to decide whether they think you can afford to meet the repayments of your loan). Smaller payments also help to ensure that your investment remains cash flow positive, especially when interest rates begin to rise again – and they will!

2- The second reason is just a fact of life when it comes to paying of mortgages. It takes about 7 years to start making any headway on a P&I loan. So it follows that making the higher payments required for P&I actually don’t get you very far.

3- There are tax advantages to having Interest Only loans. As an investor, the interest on a loan for an investment property is tax deductible. While this isn’t a reason in itself to not pay down a mortgage, it is a wee bonus in your favour!

Don’t forget, you can still pay down the principle of an interest only loan by making lump sum payments. The difference is that you get to choose when those payments are made rather than being forced to make small, incremental payments each month. As an investor, the best bang for your buck is to use the benefit of a better debt servicing ratio to be in a position to purchase again sooner. Who knows, you may be able to purchase a quick trade and then use the profit to pay down the mortgage on your buy and hold property.

The same logic can be applied to the loan on your family home. The smaller your payments are, the more you are likely to be able to borrow for investing. The difference is that loans on family homes are not tax deductible, so any lump sum payments you make should be made to these loans first.

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