Investor questions answered : 1

Principal and Interest Vs Interest Only repayments - what's the difference?

​A Principal and Interest (P&I) loan is the most traditional type of loan for home buyers. Your repayments each week, fortnight or month are set aside towards paying the interest accrued on the loan as well as paying off some of the original loan - called the principal. Hence the name ‘Principal and Interest’.
When you first start paying a P&I loan, the majority of your repayments will be going towards covering the interest that is being charged, and the remainder contributes to reducing the principal amount owing. Over time, as the amount owing decreases, the interest charges reduce, therefore each payment pays more off the principal.
When you take out an interest only loan, as the name suggests, you only pay the interest on the loan. This means that you are not repaying the principal, so your loan balance does not decrease. An interest only loan improves your cash flow as the repayments are slightly less than a principal and interest loan, but you have to take note that you are not paying the debt off. Typically an interest only loan are for investors who claim the interest on the loan as a tax deduction, as under the Australian tax system you can’t claim the interest as a tax deduction on the home you live in. Many seek to pay off their home loan as quickly as possible with a principal and interest loan, and use an interest only loan on their investment property to maximise their tax deductions.

What's the difference between Joint Ownership and Tenants in Common?

​​Joint Tenancy is when the joint tenants own the whole property together. If one joint tenant passes away then the surviving joint tenant owns the whole of the property (and therefore the property does not form part of the deceased estate and not available for distribution to the beneficiaries of a will).
Tenancy in Common is when Tenants in common each own their individual share in the property.  Shares may be held equally or in another proportionn the property will pass according to the provisions of the deceased’s will or in the absence of a will in accordance with the rules of intestacy. Where a person owns an interest in a property as tenants in common with another owner, then if that person passes away, their estate continues to have an interest in the property. 

What is amortization in lending terms?

​In home loan terms, amortization is the distribution of your loan repayments into multiple cash flow installments, determined by an amortization schedule. Each repayment installment consists of both principal and interest. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal towards the end of the loan/amortization schedule.

What is a holiday home?

A holiday home is an investment property that is leased to a resort to manage. It is not a home purchased as an investment and which is used predominantly by the applicants for their holidays (and personal use). 

How a building depreciation schedule report will save you! Have you had one completed?

Just like a person can claim expenses on a car purchased for business purposes, one can also claim the depreciation of an investment property against taxable income.
Anyone who purchases an investment/rental property is entitled to depreciate both the items within the building and the cost of the building itself.
Thousands of dollars go unclaimed by property investors each year who are not in the know. All it involves is a qualified quantity surveyor to inspect your property and prepare a report for your accountant. The savings can be huge!