Interested in Interest

When I started off investing in property my main goal was to pay the debt off as much and as fast as I could. Paying principal + interest helped you reduce your debt and forced you to put the money into the mortgage. I never understood why someone would only pay interest and leave the debt at the same level for so many years.

Three years later, and I understand why. Paying interest only is first of all tax deductible in Australia (principal payments are not tax deductible). The money you save from not paying principal can be saved up and utilised to continue investing in more properties. Secondly, even though your debt level stays the same, the value of your property and rental return should be increasing as each year goes by. Obviously this only works if you are disciplined. My worry is if I don’t utilise the extra money for investments and perceive it as extra spending money.

I’m going to convert both mortgages to interest payments only and see how I go with this. The plan is to put the extra money into an offset account until I accumulate a healthy amount to buy again. I should be saving around an extra $300 a week converting to interest only payments.

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