offset account

[scott]

I was asked in a PM to answer a question concerning offset accounts. As I am no expert I will give over my understanding of offset accounts and others can correct or add to it.

Offset account work like this- if you have a loan for $100k you naturally pay interest on the $100k.

If you have an offset account to that $100k loan and have a spare $40k in that account then you only pay interest on the $60k.

(however you still pay the same 'interest' amount each month but the money that would have paid for the interest on the $40k comes off the principal).

In my case it is shown on my ANZ bank statement at the end of the page as
'mortgage offset - interest saving $xyz.00"

Be sure that the mortage offset is 100% offset and not 50% offset. As with the above example that bank only takes into account half of the money in the offset account. (In the above example they would only count $20k)

Use the offset account facility on your PPOR first rather than an IP as it is better to reduce non tax deductable interest of your PPOR rather that deductable interest from an IP.

What is the value of an money in an offset rather than say ING earning 5%?

Money in ING gives 5% and that is taxed. Money in an offset reduces interest that you would have had to pay so in essence your the money is working at double the interest rate of your mortgage (providing you are on the highest marginal tax rate).

Why not just pay down the PPOR loan if you have $40k? Once you pay down the loan then if the PPOR ever becomes an IP in the future, the interest becomes deductable and if you have paid some of this down you have less interest to claim.

Also if you choose to use credit cards for most purchases using the 55 days interest free and have salary put in offset account then you have a small advantage of salary in offset mortgage until you PAY OFF the credit card EACH MONTH.

Hope this helps
Scott

 

[Simon]

Good explanation. Getting this through to people can be quite tricky.

Thanks mate,

 

[Les]

G'day Scott,

Maybe it's different for different Banks, but....

(however you still pay the same 'interest' amount each month but the money that would have paid for the interest on the $40k comes off the principal).

In my case, I pay ONLY the required Interest - none of this "pays off principal" on my loan (and, yes, it's a P&I loan too). It reduces my Interest owing per month - full stop. Thus:-
1. Interest cost is less per month and
2. The mortgage is NOT paid back prematurely (which could hurt if I made the PPOR a rental later)

Be sure that the mortage offset is 100% offset and not 50% offset

Good point _ I've heard these are "out there"

Why not just pay down the PPOR loan if you have $40k? Once you pay down the loan then if the PPOR ever becomes an IP in the future, the interest becomes deductable and if you have paid some of this down you have less interest to claim.

EXACTLY why I DON'T want a deal which takes "offset savings" and "pays them off the principal". Leave it to me to pay off principal when I want to - I don't want to minimise principal amount owing - I want to OFFSET it !!!!

Then, when I make other moves, the mortgage is still the highest it would've been (while I re-invest where I want to, and don't dilute my savings by now having to pay more Tax)

But then, I'm not an expert either..... So this is just my opinion

Edited later:- BOY !!! I REALLY screwed up on this one (apologies) - see the "Mea Culpa" post below. Please disregard above

Regards,

 

[Programmer]

In my case, I pay ONLY the required Interest - none of this "pays off principal" on my loan (and, yes, it's a P&I loan too). It reduces my Interest owing per month - full stop. Thus:-
1. Interest cost is less per month and
2. The mortgage is NOT paid back prematurely (which could hurt if I made the PPOR a rental later)

Must admit, I had 'hoped' it worked this way too. I had a look back on a thread I started a while back:

From "Property Finance"->" LOC->'offsetting' and 'Offset' " forum:

Hi Programmer.

Don't think this point has been mentioned, even though it is obvious.

Once you withdraw/take back any money sitting in the offset, your repayments will increase by the amount you withdraw (same as a LOC).

Obvious point as I said, it's just that once you get used to lower repayments (from having funds in your offset), you have to readjust your budget if/when you use that money again.

Regards
Marty

and Mikhaila replies with:

Marty

This is not correct. The offset repayment amount doesn’t change and it is independent of the amount you keep on the offset. The only thing that changes is the balance between the interest and principal you pay. Here is an example:

Loan 100K @ 7% for 25 years
Monthly payment required by the bank - $500 (lets just assume this is correct amount. I didn’t calculate it precisely)

Offset amount – 100K
You still have to make $500 a month repayments but these payments reduce your principal

Offset amount – 50K
You still have to make $500 a month repayments but these payments reduce 50% principal and 50% goes to the bank

Offset amount – 0K
You still have to make $500 a month repayments but these payments reduce about 5% principal and 95% goes to the bank assuming it is P&I loan.

Not such an obvious point after all.

M.

and Rolf pops in:

Hiya

Got to butt in here.

In p&I cases you are 100 % right.

IN IO cases many lenders will reduce the repayment as per the balance so much so that if the offset = the loan balance there is no interest payable.

ta

rolf

lastly Kissfan:

Hi all.

My apologies if programmer was referring to a P&I loan. I assumed he/she was talking about an I/O loan to which my previous post was in reference to.

Thanks for the heads up Rolf

Regards
Marty

So, it appears it's the 'product' that's the difference? As opposed to 'type' of loan? Now I'm not sure I see the point of an offset with PPOR P&I if you get a loan where the reduction in interest due to any offset amount simply reduces the principal. Can someone assist?

PS. When I say "I don't see the point" I'm referring to only the principal reduction aspects, there are other benefits too of course to offsets.

 

[Rolf Latham]

.




Please see above



In all seriousness, thats a weird question, I dont understand, blonde morning I think ?

As we know by now, the core benefit of the Offset is to isolate tax paid money from current or future pontential investment (deductible) money. The fact that the principal reduces on a PI loan is just fact of life with that style of product.

ta

rolf

 

[Les]

Mea culpa.....

G'day Programmer,

So, it appears it's the 'product' that's the difference?

No, mate - I think it's me (not thinking the whole thing through... )

I've just realised that my case is NO DIFFERENT from those quoted above. I was thinking of how I pay less Interest (because of the Offset) - but, my usual monthly payment IS made - and thus reducing the principal owing, just as others says it does. (Referring here to my PPOR loan which is P&I)

So, my apologies for confusing others. (For a while there, I thought I had some "you beaut" product - a State Credit Union - that was different from all the rest) but, NO, mine is affected the same way. So the principal IS reducing because of the Offset interest saving.

BUT, I also have Offsets against IO - and in THIS case, it is as stated.

Sorry for the confusion - looking again at Scott's post, I think he's nailed it.

Keep in mind though, that the Interest saving is a FAR SMALLER amount to reduce a PPOR loan than "paying off" by the same amount. If I have a spare $10k, if I pay it off the mortgage, I've reduced the underlying mortgage by $10k. But, by keeping that $10k in an Offset, I'm reducing the mortgage by only ~7% of $10k per year ($700 pa) - a BIG difference !!! Then, if I rent my PPOR later, the mortgage is larger (and Tax deductible) than it would've been if I'd paid the $10k straight off the mortgage.

Regards,

 

[Peter_Tersteeg]

In principal everything said here is correct...

BUT

Not all offset accounts are created equal, depending on the lenders policy. Some lenders treat it like their regular savings account, the interest earned on the account is simply deducted form the interest paid on the offset, so rather than 6.xx, you only save 5.25% interest.

Other lenders take the average or the minimum amount in the account for the month and give you a saving on that amount, whilst some only calculate the benifits monthly, rather than daily.

There are many TRUE offset accounts out there, just make sure you understand exactly how each lender operates their offset account if this is a significant factor.

 

[Rolf Latham]

Hi Pete

Teee hee


In Principal, hahah

ta

rolf

 

[Programmer]

Here was I thinking more trees were jumping out... Phew!

In all seriousness, thats a weird question, I dont understand, blonde morning I think ?

As we know by now, the core benefit of the Offset is to isolate tax paid money from current or future pontential investment (deductible) money. The fact that the principal reduces on a PI loan is just fact of life with that style of product.

Yeah, a blonde tired moment. What I really meant to say was that I thought I'd understood the basics and then Les throws me this curved ball! Although I do have to admit that I'd forgotten about the principal being further reduced because you're essentially paying more of it off - due to less interest, same repayment amount. It's logical, and I wasn't at 2:30am.

I'd been up with my 13 month, new teeth, screaming his gums off. Ah, kids, love 'em.

 

[Les]

G'day Programmer,

and then Les throws me this curved ball!

I have others.... Wanna see them?? (Fast ball, flipper, leg off-spinner, didn't-see-it-coming, etc )

Reckon I also had a "late night" when I wrote that earlier one - sorry, mate

Regards,

 

[qaz]

What about the world famous "mystery ball"?

 

[Programmer]

I have others.... Wanna see them?? (Fast ball, flipper, leg off-spinner, didn't-see-it-coming, etc )

Reckon I also had a "late night" when I wrote that earlier one - sorry, mate

Nah, no apology necessary.