100% Offset

W

whatdoyouwant00

Hello everyone,

This is probably a stupid question but i am a newbie...

I have just purchased my 1st house (FHOG) and have set up a 100% offset account as i always have money held in accounts for paying bas, tax etc that could be used to offset the loan on the house.

Now the loan is for 384k and say i have 100k sitting in the account i will only pay interest for 284k......but what i dont get it does that make the monthly payments less whilst the 100k is there or does it make the monthly payment the same but change the proprotion of Principle being paid vs the Interest??


Thanks

Brendon
 
Depends on your PPOR loan. If it is principal and interest (P&I), then as the repayments are a scheduled (fixed) amount, the offset interest savings will effectively mean more is paid off loan principal. If you have an interest only (IO) loan then the offset savings will reduce your monthly interest paid on the loan and not affect the principal balance.

Cheers
 
Even if you have an interest only loan some of the lenders will maintain your repayments as if you didn't have the offset account unless you ask them. Strange but true :p

Cheers, Medine
 
Brendon,
If I were you I would change the P&I loan to Interest only
in case you want to convert it to an investment property
later on.
Cheers
 
Hey BV,

Yeah i checked that out and it will cost me $80 to change the loan to an IO, and because i don't know whether i will make it my permanent home i would rather knock the principal down
 
whatdoyouwant00 said:
Yeah i checked that out and it will cost me $80 to change the loan to an IO, and because i don't know whether i will make it my permanent home i would rather knock the principal down
Click to expand...

Doesn't matter. Going IO, with an offset is the most flexible whether you use it as PPOR or IP. There is no difference in interest paid between having a $200k loan and $100k offset and 'knocking the principal down' by $100k. In both cases you're paying interest on $100k, but with an offset it's much more flexible and beneficial if you want to change from PPOR to IP.

You should think about IO with offset ESPECIALLY if you don't know whether it'll be your permanent home. If there's even a chance you'll switch PPORs, IO and offset will be much better financially.
Alex
 
Thanks all,

It does make more sense now. Only question is does having say 100k in a 100% offset effect the monthly repayments?? ie reduce them?
Thats what i don't get with the IO atm...


Brendon
 
whatdoyouwant00 said:
It does make more sense now. Only question is does having say 100k in a 100% offset effect the monthly repayments?? ie reduce them?
Thats what i don't get with the IO atm...
Click to expand...

Depends. If it's IO, your payments will reduce. If it's P&I, per some other posts the bank might take the same payment and just apply more towards your principal? That partly defeats the purpose of using an offset, since you want flexibility.
Alex
 
Yes that offered everything i was after, i have just rang them and am expecting a call because the guy wasnt sure whether having 100k in the offset with an IO loan would :

a) Reduce the monthly payments (but keep the loan term at 30 years)

OR

b) Maintain the monthly payments (but reduce the term of the loan)

Will know soon.... btw i have changed it to IO, makes much more sense! It made me realise just how many people out there must have badly structured loans/investments :S

Thank you :)
 
whatdoyouwant00 said:
btw i have changed it to IO, makes much more sense! It made me realise just how many people out there must have badly structured loans/investments :S

Thank you :)
Click to expand...
Now if you can combine this package with a credit card that is paid off automatically every month you can use the banks money for all your shopping leaving your sallary, cash etc in the offset and reducing interest charges further.
Cheers
 
people who get the credit card auto paid each month need to be very disciplined to only spend what their budget allows.

Setting the cc limit to match the monthly budget is one option to control spending but doesn't work as well as it could because banks let you spend more than your limit - but not by a whole lot, but enough to cause autopays to need more than your income and you start racking up $40 fees

Works better if you have cc and make a manual payment each month. But, absolute discipline required ( need new tyres for car, kid's dental appt etc. Easy to max out the card )
 
If someone doesn't have the discipline to stick to a reasonable budget (or savings to cover 'unintended' expenditures) they should just stick to P&I. They should also avoid aggressive IP investing. Buy your own place, Wait 10 years, then buy an IP, wait another 10 years, buy another IP. In 30 years you're still going to end up with 4 fully paid off properties, which is far more than the average person anyway.

No point buying a place only to lose it because you can't manage your money (look to Sydney's West).
Alex
 
RichardK said:
people who get the credit card auto paid each month need to be very disciplined to only spend what their budget allows.

Setting the cc limit to match the monthly budget is one option to control spending but doesn't work as well as it could because banks let you spend more than your limit - but not by a whole lot, but enough to cause autopays to need more than your income and you start racking up $40 fees

Works better if you have cc and make a manual payment each month. But, absolute discipline required ( need new tyres for car, kid's dental appt etc. Easy to max out the card )
Click to expand...

It's not that hard. I have a monthly limit of $4.5K and it's working well
I monitor my expenditure though and if I have an unexpected expenses
like council rates, the purchase of an appliance, etc
I just transfer some extra funds into the c/card.
Or for those I can use Eftpos, so that money comes from the savings account.
 
agree with you both and glad to hear it's working for you BV.

The point I'm making is that the offset cash amount is usually around $1000 average ( 5k salary, 2k5 mort payment straight away and the other 2500 is used throughout the month till 0 is left ) so the $1000 saves you $70/year. It only takes 2 overlimit fees in a year to wipe out the savings.

Guess I should have said this first time around. I see too many clients who struggle to make mort payments and have thousands owing on cc, which never gets paid down to zero, costing them 17% int. As alexlee said, they're the ones who should only ever have P&I loans.
 
It depends on how much shopping you do.
Sure if you are 1 person why bother, but if you have a large family
with lots of expenses it would be worthwhile.
I think the saving for me would be between $150-$250/y
perhaps not a huge saving but better than nothing.
cheers
 
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