Interest only loans

[Old Mate]

hey all

i was hoping for some clarification on using an offset account with an interest only loan. Basically can i put the money i save into the offset account and then use that to pay off the principle amount whenever i'm ready?

If so would you reccomend this for a first time IP buyer with a low income?

Thanks in advance

 

[yo yo ma]

IO loans usually have a set term, say 5 years. After this finishes the loan reverts to P&I. However, you can usually negotiate to extend the IO loan for another period. In theory, you can keep the IO loan going indefinitely, as long as the value of the property rises.

You must be diciplined with your spending for this type of loan to work. If you tend to buy things that you don't really need, the temptation of an offset account may be too much.

 

[Old Mate]

Ok thanks yo yo ma. I'm confident I'll stay disciplined as I still live with my parents and have next to no expenses. PS awesome avatar

 

[yo yo ma]

Thanks Old Mate

To summarise, the main advantage is serviceability ie you can make lower repayments to increase your cashflow. This allows you to claim the maximum tax deduction.

The main disadvantage is if interest rates continue to rise, or if the property market falls, you may be left to sell a place at a loss. Of course, these things could occur with a P&I loan too. If you use the offset account correctly (by adding what you would normally pay on a P&I loan), this will minimise the risk.

Your lender/ broker will be able to give you more specific information.

 

[Rixter]

i was hoping for some clarification on using an offset account with an interest only loan. Basically can i put the money i save into the offset account and then use that to pay off the principle amount whenever i'm ready?

All depends on what you are wanting to achieve from this structure?

Its a good finance structure if its your PPOR and/or you intend to convert it to an IP, otherwise there is no financial advantage to paying any principle off a IP loan.

You would be far better off, putting what would normally be the principle portion of repayment, towards the holding costs of another IP.

That way you would be doubling your asset base and exposure to future CG and net worth.

Hope this helps.

 

[Rolf Latham]

Be aware that not all lenders IO loans are true IO

Some like Heritage and STG IO ( owner occupied) are interest based.

This means u will pay the same payment each month regardless of how much is in the offset, and any effective savings reduce the principal

ta
rolf

 

[mja]

Is it true that if I have a loan of $200k, and $200k in my offset account, the bank can then use the offset funds to wind up the loan?

 

[Old Mate]

Thanks for the advice everyone. Much appreciated

 

[lenojd]

Be aware that not all lenders IO loans are true IO

Some like Heritage and STG IO ( owner occupied) are interest based.

This means u will pay the same payment each month regardless of how much is in the offset, and any effective savings reduce the principal

ta
rolf

I thought STG were true IO

do you know which majors are true IO?? Hopefully Westpac are (was thinking about going with them)

 

[Welcome]

I thought STG were true IO

My understanding is they have both a 100% offset and a partial offset.

What I think Rolf was referring to is they have a shitty product where any interest you save by having funds in your offset account is then used to pay off the principal. I was caught out with this but it was easily changed to "repayment offset" so the principal isn't paid off at all.

 

[WinstonWolfe]

Be aware that not all lenders IO loans are true IO

Some like Heritage and STG IO ( owner occupied) are interest based.

This means u will pay the same payment each month regardless of how much is in the offset, and any effective savings reduce the principal

ta
rolf

Rolfie, you need your own content rich web site........to direct somersofters to.....
set up a process maps / flow charts type algorithm..........systems are everything these days.....

outsource to microsoft I say........

 

[Insan3]

Is it true that if I have a loan of $200k, and $200k in my offset account, the bank can then use the offset funds to wind up the loan?

No, I have never heard of any circumstance where a bank can access your account with ZERO authorisation and take your funds.

Most cases, they would probably prefer you to go and spend the offset on a ferrari, so they can start picking up Interest again..