Offset code needs cracking

[MopTop]

I want to set up an investment loan with St George: 15 yr interest only, then 10 yr principal + interest. Also I want to link a 100% offset Mortgage Equaliser to this loan.

As far as the offset goes, I have a choice of:

--- 100% interest offset, or
--- 100% interest offset with repayment offset option

Both the bank and current broker are confusing about which I should go for or even what's the difference. I haven't had a satisfactory explanation.

So I look at the St George site and see:

"How to maximise the benefits of Mortgage Equaliser
..
3. Repayment Offset for Investment Loans with Interest Only repayments.

Customers making interest only repayments on their investment loans and who have a linked Mortgage Equaliser 100% interest offset account, can now also take advantage of the 'repayment offset' option at no additional cost. This option works to reduce the required monthly interest only repayment amount by the amount of the monthly 100% interest offset benefit, rather than reducing the loan principal."


Now, after reading that, I think I should choose the second option: "100% interest offset with repayment offset option" for my Mortgage Equaliser.

But I thought what's described above is how the simple "100% interest offset" would work too. Moi Confused.

Has anyone been through this? CAn anyone advise what the implications of choosing one or the other is in terms of operation, tax, etc.

Help appreciated.

cheers
MT

[Sim]

Sounds to me like they do fixed repayments by default and the new option is giving you the choice of having flexible repayments based on the amount in the offset account.

I'll make up some numbers to illustrate.

"100% interest offset"

Let's say you borrow $100K, and your (interest only @ 6.5%) repayments are calculated to be (approx) $540 per month.

It sounds like St George expect you to pay that $540 per month in interest-only payments, no matter how much is in your offset account.

For example, you have $20,000 in your offset account, thus your effective loan balance is $80,000 - and the interest owed for every month that balance is maintained is (approx) $430.

My understanding is that St George will still take $540 out of your account, even though only $430 is required for the interest payment (because of the offset account). This means the extra $110 you pay will be taken off your principal, which may not actually be what you intend (but may actually be a good thing for you - it really depends).

"100% interest offset with repayment offset option"

With the alternative, it sounds much more like most other banks I have dealt with in that for IO loans with offset accounts, they actually reduce the monthly interest payment for you, thus saving your cashflow, but not changing your loan balance.

Using the same numbers as the example above, the money in the offset account drops the normal monthly interest payment from $540 to $430, so at the end of each month, rather than taking the full $540 from you like in the first example, they only take out $430 in interest payments. Of course, like a true IO loan, the loan principal doesn't actually decrease.

As for which is better ?

Well, the second option is (in my experience) by far the more common option with other banks - and it allows you to minimise your cashflow while maintaining the maximum tax deductibility of your loan account (especially if you later decide to use the funds in the offset account for something else).

However, the first option sounds like a nice facility if you are actually planning on reducing the principal of your loan anyway, but want a bit more flexibility than a P&I loan would offer (where you have to make a fixed payment no matter what). This option would allow you to make a smaller fixed payment than you would if you were on P&I, so cashflow is easier, and if you need to use all the money in your offset account for something else, then the loan reverts back to a pretty normal IO loan without offset.

[MopTop]

Hi Sim

Thankyou very much for taking the trouble to write such a full reply. What you posted is extremely helpful to me and I appreciate it.

For now, I want the scope to use the investment loan as a quasi-LOC so in line with your thoughts, the "..with repayment offset option" seems most appropriate.

Thanks again

cheers
MT