Interest Only Loan with Offset

Hi all,

I'm fairly new to property / investing and finance in general. I was wondering theoretically if you had an IO loan with a 100% offset account with the amount of the loan what happens to your repayments.

Do repayments go to zero?
or
Do repayments now contribute to the principal?

Is this a tax effective use of a large amount of cash or are there other more effective alternatives?

Thanks.
 
There are a couple of lenders with exceptions, but with most lenders the repayments reduce to zero. Happy day! :)

It means you'll get less tax deductions which might actually mean you have to pay more tax, but you're saving a lot of interest by doing this (which would be worth more than the tax deductions).
 
If you had equal to or over the loan $value in your offset account, your repayments (I.e. Interest) would be $0 for the time period your loan was Interest only.

It's dependent on your situation whether that's the most tax effective strategy for your cash, but if you consider you'd be putting it into a savings account earning interest you'd then have to pay tax on.....in my opinion an offset account is usually the best place to put your cash when you're not investing it :)
 
H I was wondering theoretically if you had an IO loan with a 100% offset account with the amount of the loan what happens to your repayments.

Do repayments go to zero?

As Pete mentioned - for most lenders it will just cause $0 repayments.

Cheers

Jamie
 
Does this method also give an added benefit of asset protection or is that a really dumb question :confused:

Depends on how much searching someone does.
If they look you up and they find a house, but it has a mortgage registered on the title they might not bother going after you. The balance could be $1 or $1M for all they know. And I doubt offset balance changes things that much?
 
Does this method also give an added benefit of asset protection or is that a really dumb question :confused:

In theory yes

With most lenders the money sitting in redraw is their money which they will allow you to redraw under terms and conditions.

With most lenders offset acct is ur money

Buys time more than anything else

T

Rolf
 
In theory yes

With most lenders the money sitting in redraw is their money which they will allow you to redraw under terms and conditions.


But if it is done as a redraw set up, this visibly/actually shows a reduced balance on the mortgage doesn't it?



With most lenders offset acct is ur money
Buys time more than anything else

So it just takes more time to dig and find offset funds but easily done? so not a good protection buffer?
 
In theory yes

With most lenders the money sitting in redraw is their money which they will allow you to redraw under terms and conditions.


But if it is done as a redraw set up, this visibly/actually shows a reduced balance on the mortgage doesn't it?



With most lenders offset acct is ur money
Buys time more than anything else

So it just takes more time to dig and find offset funds but easily done? so not a good protection buffer?

I wouldn't think cash would be a safe thing if u are at risk of being sued.
Ta

Rolf
 
An offset account provides a small amount of protection from the bank, as Rolf suggests they they have more control over a loan account than a deposit account (in essence an offset account is just a deposit account with some funky features).

An offset account gives you no asset protection from a third party trying to sue you. Asset protection is provided via arms length entities rather than account structures.
 
Thanks Peter, we purchased PPOR in joint names and now has no mortgage, the stamp duty would be massive if we transferred to a trust structure as well as losing the CGT advantage, so was just wondering on that when I saw this thread.
I guess the only option is to take a separate loan out against it inside a trust. Am seeing the accountant again next week so will have a chat to him about this as well as IP.
 


I wouldn't think cash would be a safe thing if u are at risk of being sued.
Ta

Rolf


Currently not a great risk. But we are building (eventually- sooo many delays and no end of the tunnel yet!) a 10 unit if DA approved. This then puts us in a risk category to some extent.
While I am working out the issues on the IP structure (not purchase in trust as told we couldn't get demo, but did which changed everything)

It occurred to me that the PPOR is mortgage free and in both names so need to work around that also. As I mentioned to Peter, I will have a chat to accountant as seeing him next week. Thank you!
 
So look at taking a family equity mortgage as a part solution

Another could be to re gear to 80 % and buy assets in a trust, lend or gift to trust etc. but don't take that sort of advice from a broker go and seek specific tax and legal advice pls

Ta

Rolf
 
Thanks for the responses.

What happens at the end of an IO loan, do you just begin to pay the principal? No further interest is added?

So theoretically if I were to have a IO loan and 100% offset account with the balance the same as the value of the property I would be able to live there and have no re-payments for the length of the IO loan? Once the loan expires I could sell the property and the gains would have only cost me in terms of lost investment opportunities?
 
Thanks for the responses.

What happens at the end of an IO loan, do you just begin to pay the principal? No further interest is added?

So theoretically if I were to have a IO loan and 100% offset account with the balance the same as the value of the property I would be able to live there and have no re-payments for the length of the IO loan? Once the loan expires I could sell the property and the gains would have only cost me in terms of lost investment opportunities?

Most revert to p&i after 5 yrs. Depending on your circumstances and the bank its with, ya just renew another 5
 
Thanks for the responses.

What happens at the end of an IO loan, do you just begin to pay the principal? No further interest is added?

So theoretically if I were to have a IO loan and 100% offset account with the balance the same as the value of the property I would be able to live there and have no re-payments for the length of the IO loan? Once the loan expires I could sell the property and the gains would have only cost me in terms of lost investment opportunities?

Generally, an Interest Only loan is just part of an entire 30yr (or similar loan), so might be interest only for 5yrs at $1k per month, converting to principle and interest for 25 yrs at $1,300 per month. That's just random numbers, but it's usually something like that, you can potentially extend the interest only competent longer, but there's usually a principle and interest component for the remaining portion of the loan
 
Does this method also give an added benefit of asset protection or is that a really dumb question :confused:

Not really - well slightly because having cash means you can spend it all at the wiff of bankruptcy. But be careful not to do anything illegal.
 
YcVknRO

http://imgur.com/YcVknRO
Hi all,
Sorry to bring up a dead thread.

I'm still a bit confused. Does interest only work similar to the diagram above, i.e upon expiry the full amount of interest is payable again. Or is it permanently reduced? Once the I/O period expires and I had paid down all the interest I would then only pay the principal even if the loan is P&I.

Does this sort of product exist?
 
Last edited:
You're miss understanding how interest only works, it's not like your image.

In most cases, people have a 30 year loan which is interest only for the first 5 years. Let's assume you don't do anything to the loan after the I/O period and it simply reverts to P&I.

First 5 years: You pay the interest calculated on the loan on a monthly basis. If you have money in an offset account, the loan amount on which the interest is calcualted is the amount owing minus the offset account.
Interest = (Loan owing - Offset balance) x Interest rate% / 12

After the I/O period ends, the loan becomes P&I amortizing over to remaining 25 year loan term. The minimum contracted repayment is based on the original loan limit, amortizing over 25 years and based on the current interest rate. Given that you haven't paid off any of the principal at this point, you'll still need to make interest payments as part of the P&I repayment every cycle.

Keep in mind that P&I repayments are a contracted minimum repayment amount. You can pay more, but you can't pay less than this amount, even if you're ahead on the loan (there are exceptions, but let's ignore them).

The minimum repayment of a P&I loan is made up of:
* A principal component (which reduces the amount owing over time)
* An interest component (which is calculated based on the formula for interest only repayments above).
--- That's why it's called Principal AND Interest.

If you've got money in the offset account, or you've made extra repayments, the minimum repayment still stays the same. These extra contributions simply reduce the amount of interest paid, but the principal component is increased, which effectively pays off the loan faster.
 
Back
Top