Finance Battle #3: Investing: IO with PPOR Offset vs P&I
It's often posted that IO is preferred for investment debts. The idea is to direct that money into a higher returning option and free up cashflow. The typical alternative option is paying off the PPOR, which has a benefit of about around +2% over investment debt (Interest Rate x Marginal Tax Rate). IO loans typically come at a higher cost, so the money you keep in your pocket comes at a cost. For this calculation we will see if its worth paying IO assuming the additional cashflow is put into the PPOR offset account. What is IO When you use an IO option your principal repayments are deferred for 2-5 years. After this period the loan reverts to P&I. As the P&I period is now less, say 25 years, your borrowing capacity is reduced. By paying no principal you get keep extra money in your pocket and the investment debt stays higher. As an example, you might pocket $100 at the cost of $20, meaning your investment debt is $100 higher vs $120 lower on P&I. Once off W...