first property loan - offset account

[JBY]

Hi all,

My first property purchase. I think I understand 100% offset accounts but just want to double check and clarify that my understanding is correct, as online calculators designated as 'offset account calculators' seem to focus on the time saved on your loan rather than how it effects the recalculation of monthly repayments. Im also curious as to whether the money in the 100% offset account recalculates the principle on which the interest in charged in the same way - regardless of whether the loan is designated principle and interest or interest only repayments. Ive calculated the figures below assuming an interest only loan and using the repayments calculator on interestrate.com.au.

Ok, so here is where I am at:

Loan = $230,000. Variable Interest rate=4.5%. Term=30 years. Monthly interest only repayments therefore = $814.58.

I get myself a 100% offset account and stick $40,000 in it. Therefore, my understanding is that as long as that money is the account for the whole month, my monthly repayments will automatically be recalculated as follows :

Principle=$190,000, therefore monthly interest only repayments would be = to around $672.92.

Dont get hung up on the figures, I just want to check Im on the right track here.

Cheers!!

 

[Electro]

This has been discussed many times before - just do a search if you want more info or elaboration...

You basically have it spot on. The calculations for interest repayment on an IO loan with offset would be:

Interest = (Total Loan amount - Offset amount) x Interest rate

Note this is calculated daily in most cases.

Now as I understand it this is how it works for the majority of offset accounts. However, I do believe that there are a few lenders that will actually reduce the priniciple of the loan by the difference in interest rather than reduce your payments. Best to check with the lender.

 

[Rolf Latham]

St George on PPOR loans, Heritage ( last time I looked) and Homeside are a few

ta
rolf

 

[JBY]

confused further....

Well from talking to St George today they have only confused me further. Apparently the above scenario applies to an 'investment loan', but if it is a loan for a principle place of residence then the offset works differently whereby you pay the same monthly repayments regardless of what is in the offset account and then something about the money in the account reducing part of the principle of the loan, which is not not what I want to do as I intend to use the property as an investment eventually.

The scenario I described in the original post sounds like the St George 'Mortgage Equaliser' whereas if it is for a PPOR it is something else altogether. Any enlightenment from a anyone who has a St George loan would be appreciated!!

 

[Rolf Latham]

Hiya

STG and PPOR and IO offset doesnt work the normal way.

Any interest savings reduce the principal.

Simply use a lender that will allow the more useful structure, CBA,ANZ, STG, ABL, WBC, Suncorp etc etc .

ta
rolf

 

[JBY]

Hi Rolf,

What you've just said is the same thing I was told by one of St George's customer service representatives.

However, I just got off the phone with my lending manager at St George, who has confirmed that I will definately get the 100% offset account as I described in my initial post.

Go figure! I guess they must be open to negotiation.

 

[Rolf Latham]

Um

I think in my industry we call that "budget or commission" breath.

Repayment offset is NOT available on PPOR loans with STG.

If you are getting this option on a PPOR IO loan, then thats great........but its outside product policies and is not "negotiable" per se but possibly being "fixed" if you like.

ta
rolf

 

[gwk]

I suggest building a spreadsheet (in Excel or OpenOffice), and then adjusting the offset to see various scenarios.

Interest/wk is calculated by this formula:

=-IPMT(IR/52;1;30*52;OL)

IR = interest rate
30 = years for loan (could adjust to 25)
52 = periods (52 weeks in a year, 26 = fortnightly)
OL = loan amount after offset

This will tell you the interest paid (a week in this example)

 

[redwing]

Anyone have an offset calculator or spreadsheet (or link)?

A workmate is looking at the benefits and asked if I had, or knew of, a calculator or spreadsheet.

 

[Rolf Latham]

Hi RW

if your friend has the right structure, for every dollar in the offset they will save having to pay interest on a dollar

eg

100 000 loan

variable rate 7 %

so pay interest at 7 % on 100 000 = 7000 pa


1000 in pffset means 100 000 - 1000 = 99 000 at 7 %= 6930 pa
and so on

The real benefit of an offset isnt the rend in interest paid, its the tax position that may work if the turn the place into an IP later.


ta
rolf

 

[Rob Williams]

The real benefit of an offset isnt the rend in interest paid, its the tax position that may work if the turn the place into an IP later.

Exactly. That's where those who work so hard to pay down their mortgage, then decide to buy a PPOR and convert the original PPOR into an IP come unstuck.
Very few people build up an offset account, rather than pay down the loan. This advice is gold. Even by Rolf's standards.

 

[Amadio]

In this scenario - $200,000 IO loan and $200,000 cash in offset account, is the bank motivated to get the clients to switch to a P&I loan?

 

[Rolf Latham]

Hiya

Only if the lender is in risk management mode

The lender makes no money on Principal redns..................though it does reducer their recovery risk over time

the 200 200 scenario is a therotical one.

I would always recommend the client leave a 1000 differential so there is a littel bit of interest each month and the loan isn picked up as "inactive" as easily.

In the current environment of costly money, lenders dont like having to make provision for money that you arent actually using.................

ta
rolf


ta
rolf

 

[Amadio]

Good to know - thanks

 

[ironscythe]

Anyone have an offset calculator or spreadsheet (or link)?

A workmate is looking at the benefits and asked if I had, or knew of, a calculator or spreadsheet.

there you go heres how it works

1] change date in A2 to align future dates
2] change amount in b2 for your initial principal
3] for further years just copy and paste cells below (note do not copy row 2 )

cheers
Iron

 

[ironscythe]

sorry forgot to mention that all offset amounts should go in deposits column

 

[Brett IP]

Exactly. That's where those who work so hard to pay down their mortgage, then decide to buy a PPOR and convert the original PPOR into an IP come unstuck.
Very few people build up an offset account, rather than pay down the loan. This advice is gold. Even by Rolf's standards.

Im one of those people!!! Never intended to turn the house into an IP & really didnt know much at the time, never planned the loan properly & repaid quite a bit of the principal and made withdrawals etc. Should have had an offset account.

Now I have to sell the house as the loan is completely unclaimable. Shame, but live and learn.

 

[artlez]

The real benefit of an offset isnt the rend in interest paid, its the tax position that may work if the turn the place into an IP later.

By tax position, do you mean the dollars we don't put into a deposit now, we can use as tax deductible repayments (assuming neg gearing) further down the track with other properties?

 

[Rolf Latham]

Hi Art

Best way to describe it is

Assume u have a ppor with a debt of 100 k

If you tin that PPOR into an IP, the interest thats deductible against the rent earned is 100 k

If you have now paid off the 100 k, and the loan is at zero, there is no tax dedn against the rent. Worse still, because you have used all ur spare cash to repay the loan, you need to make a much larger non deductible borrowing for your new PPOR.

Easy fix

Isntead of paying down the loan to zero, place the 100 k nto an offset
account against the loan. Same net effect on interest payments

But when you buy a new PPOR, you can use the 100 on the offset, AND the 100 k loan on the IP is now fully deductible agains the rent

ta
rolf