Investment Loan: PI vs IO

Everyone who has delved into investment property would have heard the mantra: "For investment property, do Interest Only loan instead of Principal and Interest loan to maximize your deduction". I did, and I followed that mantra blindly until one day it dawned upon me that I have never checked the math at all. So one night I checked the math, and here are the results:





  • Assumption 1: 100% LVR for easier calculation, the LVR does not affect the final nett income difference between PI and IO and we are only focusing on this difference.
  • Assumption 2: Both PI and IO have the same interest rate, in reality, PI usually have lesser interest rate which would further increase the final nett income
  • Assumption 3: Tax bracket set at the 30% level, this should be translated as: every dolar of income from the investment property falls under the 30% tax bracket
  • Assumption 4: no capital gain for the span of 10 years. Capital gain is ignored since it doesn't affect the final nett income difference between PI and IO and we are only focusing on this difference.

Conclusion
While IO will give about $84k cash on hand, PI will give a higher profit of about $114k in equity. The downside is that PI generates equity instead of liquid cash which requires the extra process and complication of refinancing to cash out the equity

Bonus

Here's the calculation for the scenario whereby the property is a negative geared investment property



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