Principal & Interest AND Offset Account

Thenarrator on 02/09/2017 - 19:14
Last edited 02/09/2017 - 21:58 by 1 other user

My broker just gave me this analysis which I'm struggling to understand and there is no info on the net. Talking about a "principal + interest loan" AND an "Offset account" (which I originally thought you could only either have one or the other, not both).

So currently for $500k loan:
Bank A: 4.19% for investor, interest only, fixed.
Bank B: 3.88% for investor, principal and interest, fixed.

Without offset:
Monthly payment using Bank A = approx $2000 ($2000 interest + $0 principal)
Monthly payment using Bank B = approx $2600 ($2000 interest + $600 principal)

With 250k cash in offset:
Monthly payment using Bank A = approx $1000 ($1000 interest + $0 principal)
Monthly payment using Bank B = approx $2600 ($1000 interest + $1600 principal).

The last line I don't understand.

Youre paying $1600 off your loan balance when you have an offset
VERSUS
Youre paying $600 off your loan balance when you dont have an offset. This true?

Meaning I'm worse off with an offset? (assuming I dont want to reduce loan balance yet)

• 

  tomsco on 02/09/2017 - 19:38

  +2

  Well your payment is fixed at $2600, so that will be applied regardless.

  In the offset scenario, less interest is charged (lower balance), so more of that $2600 goes to the principal amount.

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  Skramit on 02/09/2017 - 20:57

  Since it's an investment property why are you even looking at loans that pay back the principal if you don't want to reduce the balance of the loan?

  You're not making a lot of sense.

  Interest only loan plus offset account is the way to go for an IP.

  For the record you can have a principal and interest loan with an offset account.

  • 

    Thenarrator on 02/09/2017 - 21:57

    "Since it's an investment property why are you even looking at loans that pay back the principal if you don't want to reduce the balance of the loan?"

    Because if the rates for P&I is "significantly" lower than IO, then it may be wise to go with P&I.

    "For the record you can have a principal and interest loan with an offset account."
    How does this work?

    • 

      tajid on 02/09/2017 - 23:48

      +1

      Even if the rate is lower, you will get less tax advantage out of the loan if you are 'paying' it off.

    • 

      Skramit on 03/09/2017 - 08:26

      +1

      You're missing the point of an interest only investment loan then. I suggest you speak to an accountant to try to understand your strategy better. Its not just about interest rate.

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  conan2000 on 02/09/2017 - 21:15

  +2

  All depends what you want to achieve in terms of being worse off…

  You're worse off because you have reduced cash flow with bank B, but you're paying off $1600 of debt as well per month. So you'll have less debt. Presumably you don't want to reduce the loan balance for tax purposes? I'm also assuming you don't have a debt against an owner occupier property, otherwise the offset funds would be better against that (no tax benefit to that interest.

  I personally have all my loans as Principal + interest, as I prefer to reduce the debt on my primary as well as investment property. I want the IP paid off as well so it's just pure income and all my bank balance sits in an offset against my primary property. I can always change to interest only if I want improved cash flow for some reason. No offset accounts against investments for me, as I'll be paying off the primary residence for a good few years yet, but it's definitely an option based on your specific circumstances.

• 

  foxmulder on 03/09/2017 - 18:50

  First offset fund reduces your loan amount. So in first scenario you owes the full 500k but with offset you owes $250k instead.

  Bank A is interest only but it is usually fixed for 1 year which then they will change it to principal+ interest like what Bank B does.

  Both scenario for Bank B you pay the same amount every month but the amount of you pay to reduce the principal in the offset scenarii is double which means you paying the loan faster thus less interest in the long run.

  • 

    Thenarrator on 07/09/2017 - 20:03

    "Both scenario for Bank B you pay the same amount every month but the amount of you pay to reduce the principal in the offset scenarii is double which means you paying the loan faster thus less interest in the long run."

    Could you please elaborate on this. Are you implying pni with offset is paid off faster hence less interest in the long run? what if both scenario has 30yr terms? Would they both have same monthly repayment?

    • 

      conan2000 on 08/09/2017 - 21:10

      That is exactly what they are saying. The monthly payment will remain the same. But the offset reduces your monthly interest. So over the life of the loan you will pay off the principal much quicker, and when you pay off a loan quicker, you pay less interest. If you have an offset account you will almost definitely pay a loan off quicker than the loan term of 30 years. The loan term would only ever be 30 years if you make the minimum payment every month for the life of the loan and had no offset account associated with it.

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  AusGP on 04/09/2017 - 22:48

  My accountant has advised me the difference between interest only and principal and interest loans is too big now with the APRA crackdown that it is advisable to go with P&I.

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  bobski on 06/09/2017 - 14:08

  @Thenarrator - Bank A: 4.19% for investor, interest only, fixed.

  Rate seems sharp. Who is Bank A? fixed for how long?