**Reply:** 1.1

**From:** Kevin Frey

This does not seem right in my opinion. I accept that your figures are pretend but it is worth noting that for P&I repayments to be 3.5 times that of IO repayments would require an interest rate of about 1.75%!

Anyway, onto your question ...

To get the same benefit out of the IO loan at a higher interest rate than the P&I loan at a lower interest rate will require you to contribute an amount equivalent to the "principal reducing" component of the P&I loan repayment to your offset account each week.

Using your figures, the IO loan repayment is $20/week, and the P&I repayment is $70/week.

If the IO loan repayment is $20/week, and if the P&I loan is at a LOWER rate of interest, then it naturally follows that the interest component of the P&I repayment MUST be LOWER than $20 per week. Which means you have reduced the principal of the P&I loan in the first week by MORE than $50, whereas in your example you have only put $50 into your offset account. In other words your offset account has not increased by the same amount as your principal would have decreased had you used the lower interest rate P&I loan.

Let me use some REAL numbers:

$100,000 loan.

P&I Interest Rate 6.50%

IO Interest Rate: 7.00%

P&I repayments (over 25 years) = $675.21 monthly.

IO repayments = $583.33 monthly.

As it turns out, on the very first P&I repayment the interest component of the $675.21 payment is $100,000 * 6.5% / 12 = $541.67.

This means, for the P&I loan, you have reduced your principal in the first month by ($675.21 - $541.67) = $133.54.

Now let's just say you want to pay the same amount against IO and the offset account.

In this case you pay the IO interest bill of $583.33, leaving you ($675.21 - $583.33) = $91.88 to put into your offset account.

The difference of $133.54 - $91.88 = $41.66 is how much you are behind in the first month.

To get the equivalent benefit you would have to contribute another $41.66 to your offset account to leave you in the same position, which means you have really paid out $675.21 + $41.66 = $716.87.

It is also worth noting that if you really want to do this you will technically have to vary the amount you contribute to the IO versus Offset account each month because, due to your offset account, your IO interest bill will be decreasing each month (in which case it would be easier for the bank to deduct the interest from your offset account each month if possible, and save hassles).