Are repayments recalculated when money in offset > 0?

[tess85]

Hi SS'ers

as most of you know (thanks for reading my clueless posts) - We are in the process of buying a house. Now my parents have offered to lend us $100k at the cash rate for a 25 yr term. This would be great for us (and we are very grateful to them!) because the cash rate is below the bank's mortgage rate, so we'd save a bit of interest.

We would pay them back monthly as if we had a mortgage with them.

However, I'm mindful that they may need the money back sooner than expected (eg. medical expenses? unforseen emergency?) so the best thing seems to tip it into the offset account.

Hubby & I were originally going to take out a loan for $400k (the max. we can afford to borrow). We will stick to our plan and put the $100k in the offset account. However, will the bank recalculate our repayments as if we had a $300k loan?

We can afford to pay back:
- either a 400K loan to the bank
- or a 300K loan to the bank and 100K loan to parents
- but a 400K loan to the bank and a 100K loan to parents might be pushing it. And seems kinda annoying considering we've got 100k sitting in the offset.

Thanks in advance

 

[Edmond Dantes]

I've been reading about exactly what you asked, and this is what I found:

"For example, if you had a loan of $300,000 and $20,000 in your Mortgage Offset Account, you will only pay interest on $280,000.

How will a Mortgage Offset Account Benefit me?

* Pay off your mortgage sooner

Even though you are only paying interest on the $280,000, your monthly repayments are calculated on the original amount of $300,000. This means you will be making extra repayments, which will clear your debt faster"


http://www.qldprofcu.com.au/accounts/MortgageOffsetAccount.html

This is how I understand it works.

cheers

 

[tess85]

Hmmm, thanks for the link!

I do understand why they would use the original repayment rather than the recalculated one; that way they don't lower your payments to match the loan term. Instead, your loan term is shorter than expected.

but it's not great for me because I need to pay my parents monthly AND the bank's mortgage monthly....?!

 

[Spectre]

tess

If I'm reading your post correctly

You still borrow the full 400k from the bank
You still borrow the 100k from the parents

You put the parents 100k into the offset so you're only paying interest on 300k of it.

The new loan goes on interest only not principle and interest as the surplus funds in the offset will act as a principal reduction.

And as the interest is calculated then on 300k your repayment will be lower.

IF something occurs with the parents then you have full access to the cash at any time.

again, if I'm reading your post right, youre getting the money at the current cash rate of 6%. 100k at 6% on a 25 yr term p&i is circa 645 a month.

Borrow the $100k from the bank at say 7.62% i/o = 635 p/m

Is that right to you?

 

[tess85]

this is for our 1st home - being non tax-deductible debt, we'd prefer to pay p&i and to reduce it as fast as we can. Some years down the track, it'd be nice to buy an IP. I'm fairly conservative so I don't want the LVR to go too high when we do that. Which means we need to reduce the mortgage as quickly as possible.

for that reason we don't want to go I/O, if that makes sense?

 

[Qlds007]

Tess

What starts off as a PPOR often ends up as an IP.

An IO loan will give you flexibility in this regard and you can always pay down the principal at any time in the future of you decide to sell the PPOR or make it your home for good.

 

[RumpledElf]

I do understand why they would use the original repayment rather than the recalculated one; that way they don't lower your payments to match the loan term. Instead, your loan term is shorter than expected.

It saves them work. Imagine if they had to recalculate your repayments every time you added (or removed) an extra $1 to that offset account?

 

[tess85]

Well I just made a spreadsheet which did just that (then again, I am an analyst so making spreadsheets is what I do for a living). That annuities subject came in handy

Regarding Richard's point that our PPoR may not stay a PPoR - we intend it to stay that way. We plan to buy a 2BR with scope for expansion for when the kidlets com along.

My preferred path regarding getting an IP is to buy it outright a few years down the track (not to convert my PPoR into an IP). The IP debt is tax-deductible so that can be I/O - but we should focus our energy onto reducing the PPoR debt from day 1 if I'm not mistaken.

Back to the original question at hand: I've discussed this with my parents and they are happy with a 30 yr term (which allows us to focus on paying more to the bank). They also suggested increasing their amount from 100k to 180k

if that's the case, I've really got to work out how to keep their money in the offset plus pay the banks a lower repayment.

How about this situation? Borrow 400k from the bank, 180k of parents' money in offset. Request a 30 yr loan term from the bank. Due to this longer term, I can afford to pay the bank AND my parents.

Number crunching:
400k @ 9% pa over the life of the loan (worst case scenario) for 30 years = repayments of $3,218 per mth.

With 180k in the offset at the start of the loan: repayments of $3,218 per mth should see the loan paid off between 96 - 97 mths (around 8 yrs)

Parents' loan: 180k @ 7%pa over 30 yrs = repayments of $1,200 per mth

It's going to be a squeeze, hubby and I might just afford to pay $4,400 per mth of repayments. We can probably afford $4,000 but $4,400 is tight.

Now I've remembered a secondary issue: given I've taken out a 30 yr loan with a bank and paid it back after 8 years due to parent's money in the offset account... will they get grumpy about this? eg. early loan discharge fees?

 

[RumpledElf]

Read the fine print - early discharge fees usually apply in the first 3-5 years, not beyond. Nastier with a fixed loan. Ours only has a 'delayed application fee' of a couple hundred if we pay it out before 3 years.

How about you take the suggestion I got from someone else in another thread?

Set up a monthly transfer from the offset account into the loan, at the amount the bank wants you to pay as a minimum. Then pay as much as you can afford (preferably the minimum the bank wants) into the offset account, but you can vary the amount up or down at a whim without having to grovel to the bank for a payment variation.

 

[tess85]

yep - that makes sense - thanks, RumpledElf! (love the nickname, btw)

Now we just have to decide whether we can afford the bank's min. payment + payments to parents.

 

[letiha]

Can you get the loan as interest only, but continue to pay the equivelent in principle that you would have paid in addition to the interest component.

 

[alisons]

Minimum Repayments

The only way to minimise the banks repayment is to do the loan as interest only. You can always pay more than the minimum. What else do you use the offset for? Does your pay etc go into that account?

 

[marg4000]

Here's another thought.

Why not pay the bank's $400K loan at the going rate. Your parent's $180K in the offset will mean that you are paying back a much larger amount of principal than usual. Take the bank loan over 30 years.

For your parent's repayment, if you cannot affort the entire amount, then take the rest from the offset amount.

Yes, the offset will be going down, but at the same time the amount you owe the bank will also be going down, and much more quickly.

When it is time to repay your parents, you can redraw from your bank's mortgage any shortfall (check tax implications).

Do this for a couple of years and you will be streets ahead.

Easiest way to achieve this is to make the payments come out of the offset account, and at the same time deposit as much as you can into it. With a bit of effort, you may even find the offset balance increasing.
Marg

 

[Pushka]

Are offset accounts covered by the Government guarantee though? Security might be a consideration.

 

[marg4000]

If they are with a bank they are simply a savings account attached to a loan. No reason why the bank guarantee would not cover them along with other savings accounts.
Marg

 

[Pushka]

It depends on the way in which the loans are set up - if the loan is with a non-bank lender (like mine is) then the offset account will be with them too, and these accounts don't come under the guarantee. Best to check.

 

[tess85]

thanks for all the comments and debate. I will consider I/o but I like marge's suggestion... draw down on the offset account to pay the bank's mortgage. I forgot that the balance of an offset fluctuates a lot anyway (pay goes in, bills come out, etc)... so taking an extra $500 here or there to pay the bank loan isn't too bad. As long as we are diligent with the offset and not spending that money, of course

 

[marg4000]

Ber VERY diligent with the offset account. Bits here and there can add up to a lot. I suggest you keep track every month of how things are going.
With discipline, this plan can save you an enormous amount of money.
Good luck!
Marg

 

[xQuIz8]

I feel bad now, I had a $220k inheritance...

 

[tess85]

what did you do with it? how come you feel bad?