Offset amount being greater than or equal to loan amount - interest only.

[sydsider4848]

Hi,
I was just hoping someone can clarify my thinking is correct.

Using below figures to keep it simple:

Loan Amount = $300,000
Interest rate = 5%

Amount in offset = $300,000 (and assuming this amount will not go below loan amount. ie. no immediate use of funds)


If I had the above amount in offset:
1. If my loan was interest only, there would be zero repayment.
2. If my loan was P&I, the entire repayment would go to principal.

My question is - is there any point in having P&I in this case? The repayment (say $400 per week) is coming out of the offset account anyway. So yes it would reduce my principal by $400 per week but it also means that my offset is reduced by same. Either way, no interest is payable as offset>loan.

Is my thinking correct? I see merit of P&I if loan>offset (which is usually the case) but not if loan=offset or loan<offset.

Thanks in advance

 

[Peter_Tersteeg]

With most interest only loans, if you have the loan fully offset, then the repayments would reduce to $0. You might still pay account keeping fees, but this is obviously good for cash-flow.

For a P&I loan, you're contracted to make a minimum periodic repayment. If the loan is fully offset, you'll still make the same payment, but it's all principal with no interest component. You'd have to make the payment and the limit on the loan will reduce with each payment.

There are some exceptions to all this, but this generally holds true.