Interest on Home Loan & Offset Account

elecpurch on 11/01/2023 - 10:54

I've got a home loan with a single offset account linked to it. My home loan repayment is due mid of every month and the bank charges me interest at the end of every month. I've got a Credit Card which I use for my daily expenses so that my salary goes direct into the offset account. Then I pay the Credit Card bill at the end of every month as that's when it's due. The Credit Card payment is done from the offset account.

What I can't figure out is, do I save anything on interest by keeping the money (my salary) in the offset account for most of the month (~75%) or do I lose it all because I take money out of the offset account to pay off the Credit Card bill at the end of the month but before the bank charges me interest for the home loan?

Are home loan interest charges calculated daily? My home loan is with NAB!

Financial Home Loan

Comments

  • Neoika on 11/01/2023 - 10:58
    +2

    Are home loan interest charges calculated daily?

    Yes for most (if not all) as I know.

    • Hearthstone on 12/01/2023 - 12:18

      all mortgage loan is calculated daily by all banks and they tally up each month and charge you the interest
      so, every extra dollar you have in your offset account each day save you a bit more on interest

  • ValueInvesting on 11/01/2023 - 11:25
    +5

    What I can't figure out is, do I save anything on interest by keeping the money (my salary) in the offset account for most of the month

    You're doing it the right way. The interest on your NAB loan is calculated daily and charged on the last business day of the month. It doesn't matter that this coincides with your credit card due date

  • vince088 on 11/01/2023 - 12:54
    +1

    doing this at most your saving like $50 a month in interest….

    switching your monthly mortgage repayment to fortnightly will save you heaps more interest in the life of the loan, will also take about 6 years off a 30 year loan

    • Neoika on 11/01/2023 - 13:31

      It depends on personal repayment habit. If there is no offset/withdraw facility, your way is correct.

      • vince088 on 11/01/2023 - 15:03

        why not both?

        i use offset + fortnightly mortgage repayments

        • juicyg6 on 11/01/2023 - 15:05

          Switching to fortnightly also means that you're making payments sooner and you're also making more payments over the life of the loan

          • elecpurch on 11/01/2023 - 15:08

            @juicyg6: When you say switch to fortnightly, do you mean just split my monthly payments into 2 payments every fortnight or do I officially request the bank to change the payment frequency?

            • ambidextrous on 11/01/2023 - 15:30

              @elecpurch: If it's an option I would suggest switching to weekly. You need to officially request the bank to make the change

              • Neoika on 11/01/2023 - 15:54
                +1

                @ambidextrous: This is incorrect. When you are making voluntary repayments regularly without bank's request, think of a situation that mandatory repayments daily versus annually, which one is better? I think most prefer annually and also make voluntary repayments, which means monthly is better than weekly. The reason behind is that bank deducting the interest earlier in a more frequent repayments setting, which reduces the deposit amount a bit (for the next repayment calculation).

                If there is no offset/withdraw facility, frequent repayments setting is the way.

              • Hearthstone on 12/01/2023 - 12:31

                @ambidextrous: you save bugger all paying weekly vs fortnightly because you paying the same amount (52 weeks)
                you just save 7 days of interest on a very small amount

                you probably save $200 over the life of the loan if you pay weekly vs fortnightly but the down side is more payment run
                more chance things go wrong and missed payment and you get ping on your credit history so overall it is not worth the hassle

                the big diff in monthly vs fortnightly because you paying extra with fortnightly

        • xazark on 11/01/2023 - 16:11
          +4

          There is a lot of misinformation around about the benefits of this. Everyone tells you to do it but very few actually understand the math. Simply put, if the money is sitting in the offset account anyway there is no benefit to increasing the frequency of payments at all. Interest is charged daily on:
          Total loan - Offset = Total Amount to calculate interest on
          using a quick example from the OP scenario and making it simple to follow:
          Assuming monthly repayment
          500k - 50k = 450k @ 5% interest charged daily for 30days = $1849.32 interest charged for this period
          now if you instead make a $2k fortnightly payment after 15 days you get:
          500k (loan) - 50k (offset) = 450k @ 5% for 14 days
          500k (loan) - 2k (payment) - 48k (offset) = 450k @ 5% for next 14 days
          500k (loan) - 4k (2x payments) - 46k (offset) = 450k @ 5% for the remaining 2 days

          There is literally no difference.

          You do make additional payments if you make them fortnightly, assuming you don't track what is actually owing each month and continue to make the extra 2 payments per year, i.e. you make 26 payments per year (equivalent of 13mths) on fortnightly as opposed 12 monthly payments but you could achieve the same result by leaving that additional money in the offset account…

          • Neoika on 11/01/2023 - 16:16
            +1

            @xazark: Yes, the difference is negligible, but I prefer less frequent repayment (like annually if possible) while make voluntary repayments regularly as explained above.

          • elecpurch on 11/01/2023 - 16:58

            @xazark: You're correct there. Understanding the math is where most of us are going wrong. Thanks for a great response 🙂

    • lgacb08 on 11/01/2023 - 15:08

      You're deluding yourself and everyone. A $3000 payment only cost 40 cents in interest per day at current interest rate (5%). No way you can shave off 6 years of your loan doing that.

    • StalkingIbis on 11/01/2023 - 15:24

      That doesn't make sense.

      If they are putting extra money into offset, that will have the same effect as making an extra payment on the loan.

    • Shadowsfury on 11/01/2023 - 15:32

      Whilst true this is (in most cases) more due to repaying the loan faster due to 26 fortnightly payments vs 12 monthly payments

      If you're maximising how much is going into the offset it doesn't really make a difference either way

    • Hearthstone on 12/01/2023 - 12:15

      well, this is not magic, you just paying more toward your mortgage with fortnightly payment being there are 26 fortnightly payments vs 24 if you take 12 months divided by 2

  • localhost on 11/01/2023 - 14:53

    If you are too worried, change loan(or card) repayment date.

  • lgacb08 on 11/01/2023 - 15:04
    +1

    Stop counting beans, with offset there is not much worth scratching your head. Assuming you have $3000 to pay each month, delay paying it by 15 days to keep that money in the offset account only saves you around $4 each month, assuming interest rate is 5%. It's worth doing but not $50 per month as someone said.

    • elecpurch on 11/01/2023 - 15:10

      I was thinking the same as in the last few months (ever since I got the offset account), I have not noticed much difference in interest charged. Couple of dollars here and there every month but never close to $50.

      • kawinuyo on 11/01/2023 - 16:35

        The rates have also been increasing so the fact that the interest charged is not changing much means you're doing great. My interest charged per month has risen by $400 over the last 6 months.

    • vince088 on 11/01/2023 - 17:22

      @lgacb08 thanks for explaining in a way people understand

    • avoidfullprice on 11/01/2023 - 18:17

      You didn’t read and understand OP’s post unfortunately.

  • LendingWorkshop on 11/01/2023 - 19:19

    You are doing it right. And to answer your question. You are saving by leaving your salary in offset. Because interest is calculated daily and charged monthly.

    How do I know? - I am mortgage broker :)

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