Offset account & interest in advance

[cimbom]

Hello,

If I wanted to pay a set number of months worth of interest in advance on a home loan, how would the amount of interest be calculated if there was an offset account as well? Is it just assumed that the balance at the time the payment is made applies to all the monthly payments? I hope that makes sense

Thanks

 

[jonmardell]

Hello,

If I wanted to pay a set number of months worth of interest in advance on a home loan, how would the amount of interest be calculated if there was an offset account as well? Is it just assumed that the balance at the time the payment is made applies to all the monthly payments? I hope that makes sense

Thanks

Are you trying to pay the interest in advance to claim the tax deduction prior to financial year ending? True interest in advance is a fixed rate product. If you have a variable rate product with and offset account it is not going to make a difference in the interest charged if you were to put extra money in the loan versus leaving it in the offset account.

 

[cimbom]

No, I am going away and will be transferring most of the leftover money into another bank account (as it has less fees etc). I just wanted to pay the months in advance so I don't have to remember to pay these manually from the other account or budget for them while away.

 

[Terry_w]

You can't pay interest in advance unless the loan is fixed. What you could do is to put aside x months worth of interest in the offset account and let the loan direct debit it from there. If you paid into the loan it would be a reduction in principle

 

[cimbom]

Ok, thanks. Thought that might be case

 

[wylie]

You can't pay interest in advance unless the loan is fixed. What you could do is to put aside x months worth of interest in the offset account and let the loan direct debit it from there. If you paid into the loan it would be a reduction in principle

I often pay in advance more than one month on unfixed loans (simetimes several months) and as the due date rolls around the money "available" reduces. These loans are interest only though. Is that why it works? Because it is not being put towards principle?

Edit: I also officially fix and prepay some loans but I know that is different to paying early as I am describing above.

 

[Terry_w]

I often pay in advance more than one month on unfixed loans (simetimes several months) and as the due date rolls around the money "available" reduces. These loans are interest only though. Is that why it works? Because it is not being put towards principle?

Edit: I also officially fix and prepay some loans but I know that is different to paying early as I am describing above.

This would be capitalising interest. Depending on the lender/product you could be breaching the loan agreement if you do not pay the monthly interest payment. Nothing serious but some banks are more fussy than others e.g. ANZ from memory.

 

[Rolf Latham]

You can't pay interest in advance unless the loan is fixed.

unless you have one of them weird Advantede loans where they hold your funds in escrow and...............

ta
rolf

 

[wylie]

This would be capitalising interest. Depending on the lender/product you could be breaching the loan agreement if you do not pay the monthly interest payment. Nothing serious but some banks are more fussy than others e.g. ANZ from memory.

I'm confused with this answer. I am paying the monthly interest payment, but I'm paying it early because I have cash available and like to be organised so I transfer it to the loan, which reduces the outstanding debt until the interest repayment date rolls around. I thought capitalising interest was allowing interest to be added to the loan, thus increasing the loan, ie. if I didn't transfer any funds into the loan account the balance would continue to increase.

We have a couple of loans that we prepay in June for the following year. It is all done through the bank, fixed and documented.

We have a few other loans that are due on say 20th of the month. Because we don't have a regular income, if I have enough ready cash, I will transfer funds from our account into the loan account to cover that month's payment due on 20th. Sometimes I transfer twice what I need for that month, to cover the month after as well so I can forget about it for two months.

This is not capitalising interest, is it? I'm just depositing two months worth of payments at a time, paying in advance.

I've done it for years, but now you have me wondering if I am somehow breaching our loan agreement?

 

[Terry_w]

Hi Wylie

When you pay into a loan you are paying the principle of the loan. The lender then adds the interest once per month (in most loans out there). If you don't pay this monthly interest it is capitalising.

So if you pay 2 lots of 'interest' in advance you are paying down the principle and then letting the interest be added and then a second lot of interest will be added and you will be paying interest on interest (=capitalising).

Not something major if you don't do it too much ahead - it might be an issue for the bank if you didn't pay for 6 months for example.

 

[wylie]

Hi Wylie

When you pay into a loan you are paying the principle of the loan. The lender then adds the interest once per month (in most loans out there). If you don't pay this monthly interest it is capitalising.

So if you pay 2 lots of 'interest' in advance you are paying down the principle and then letting the interest be added and then a second lot of interest will be added and you will be paying interest on interest (=capitalising).

Not something major if you don't do it too much ahead - it might be an issue for the bank if you didn't pay for 6 months for example.

Thanks Terry for that explanation. I only ever pay maybe one month ahead, sometimes a few months, but have never though it may be a problem.