When you take out a loan one obvious condition of the mortgage is that you must repay it eventually. Most people do this with Principal and Interest loans ( P&I ). However investors who are using a negative gearing strategy prefer to keep the debt in place as long as they can in order to maximise the tax deduction on the interest charged and in this case they will use an ‘Interest Only’ ( IO ) home loan. These are usually 5 years then revert to P&I however some lenders will allow up to 15 years of IO.
Contrary to what you may expect, an IO home loan will probably reduce the amount that you can borrow because most lender take the reasonable attitude that you will have to repay it one day and over a much shorter period and as a result your repayments at that time will be substantially higher.
This is because the regulations don’t allow lenders to assume that you will renegotiate or maintain your annual package fee and resulting discount. As a result they are forced to use the ‘standard variable’ which virtually nobody pays and that makes the comparison interest rate look ridiculously high.
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