Your accountant will tell you that paying interest only on your rentals is ideal – and your accountant is right.
In an ideal world, you’d save money on your rental mortgages and put that additional money into your home loan, aggressively reducing your personal (non-deductible) loan. If you’re genuinely doing that, that’s impressive and you shouldn’t change a thing. If, on the other hand, you don’t really know where that money is going, it could be time to switch to principal and interest (P&I).
“Interest only is great in theory, but do we put the theory into practice?” says Michael Cave. “In the first few years of owning a rental, when cashflow is tight, interest only is a sensible approach. After that, though, when your goal is to build wealth, it’s good to chip away at your principal. There’s nothing like realising your principal has reduced and you didn’t even notice the difference – in 10 years’ time you’ve made a big difference.”
It’s not always about the accounting, he adds – focus on the big picture and the main goal of building your net worth. So if you’re renegotiating your loans this year, think about switching to P&I. Talk to your accountant and your financial adviser, and consider how it might help you achieve your long-term financial goals. A few dollars paid off your principal adds up to a lot over time.