Confused about How Offsets Work Even after Watching YouTube Videos - SOLVED

Saul Goodman on 09/03/2023 - 11:14
Last edited 09/03/2023 - 11:55

I don't know what's wrong with me but I just can't wrap my head around this. It's my first time having anything in my offset.

I have a interest only loan on a property investment which has a balance of $339,738.44 and 6.95% rate. I sold something and put $200,000 into my offset account 1 1/2 months ago so it will be in effect now. The bank took another payment but it was the same payment as always, $1,826.69. On my statement it says "By Depositing Your Savings Into the 100% Offset Sub-Account You Have Reduced Your Interest By: $1,177.97".

Every website I go to says the money in your offset reduces the interest you pay, but I paid the same amount?

Where have I saved that money?

To confirm, the loan is still interest only and they are linked correctly.

SOLVED

I have an offset sub-account which does not reduce interest repayments and not an offset account - different things. My broker mislead / lied to me after I told him my requirements and it's also on me for not double checking. Still have nfi where that 'reduced your interest by…' has gone though.

Financial

closed Comments

  • Porker on 09/03/2023 - 11:21

    Looks like you've got a fixed repayment plan/amount that pays both 'principle' and 'interest' components.

    The amount will be the same but the contribution to each of those would be different. As example, it may have been 50% principle and 50% interest of the $1,826.69.

    Now with the offset it may be 55% principle and 45% interest of that same amount, so you're paying off more principle now from the same repayment amount.

    Check your statement and the 'capitalistion' amount (being the interest repayment/component) would likely be less.

    EDIT: Just read that you have 'interest only' loan. Those type of loans don't last forever, say up to 5 years, after which they revert to 'principle and interest'. Check with your bank on the current status of the loan

    • Saul Goodman on 09/03/2023 - 11:29

      Thanks for you reply, the loan is definitely still interest only.

      • Porker on 09/03/2023 - 11:59

        If that amount of $1,826.69 is the same month to month, then your account is set to a fixed repayment.

        If it's interest only, the repayment amount would fluctuate month to month as there are different amount of days per month, plus the day of repayment won't always be a weekday such that you might pay a bit more or a bit less to account for weekends.

        OR…. the offset isn't linked to your mortgage account.

  • GG57 on 09/03/2023 - 11:24

    You still need to make repayments on your loan account, as that is what you signed up to do.
    By having money in an offset, you have saved interest which would have been charged on your loan account. If you have a redraw facility on the loan account, you could access that saved interest (as your repayments have effectively put you ahead in your repayment schedule).

  • Fergy1987 on 09/03/2023 - 11:30

    Who signs up for a 400K loan without understanding how it works?

    • dust on 09/03/2023 - 11:44

      Not sure why you're being downvoted? It's good to know what you're signing up for before doing it!

      • Saul Goodman on 09/03/2023 - 11:48

        Probably because a loan and an offset are not the same thing?

        • Fergy1987 on 09/03/2023 - 12:11

          They are related - if you only had an offset and no loan. What you would have is Savings.

          • Saul Goodman on 09/03/2023 - 12:13

            @Fergy1987: Related but they are not the same thing are they? An offset account is usually something you get 'after a loan'.

        • dust on 09/03/2023 - 12:12

          The offset is a pretty important feature of the loan.

  • Jaduqimon on 09/03/2023 - 11:32
    +1

    your repayment each month is fixed (will change when interest rate changes)

    a portion of this repayment will be an amount that repays the principal and another portion for the interest.
    By having more money in the offset, the monthly repayment will not change but the portion of the repayment that go towards paying off the principal will.

    Just look at the loan outstanding balance and compare how much it has reduced versus before you put money into the offset. it should have reduced more.

    edit: just saw its interest only loan.

    but check the T&C of the loan maybe offsets actually reduces your loan principal rather than interest each month

    • Saul Goodman on 09/03/2023 - 12:00

      Thank you and your reply is what found me the answer.

      I just read that the offset is an offset sub-account (different to offset account) which does not reduce the interest repayments. When I went with the provider, I told my broker my requirements and he mislead me. It's also on me though for not double checking and trusting my broker.

      I'll have to find another loan provider.

      • Jaduqimon on 09/03/2023 - 12:03

        yes refinance. also unless you are really tight on cashflow which u don't seem to be (200k in the bank), its way cheaper to get a P+I loan than I only.

  • dsp007 on 09/03/2023 - 11:38
    +1

    With my bank, i get 2 transactions (mine is principle and interest though but still should work the same way).
    1st is the main monthly figure which comes out (never changes regardless how much offset i have) which reduces my loan balance
    2nd is the interest charged back to the loan (which increases my loan balance).

    The 2nd portion is what is variable when it comes to money in an offset.

    Are you sure there isn't a separate transaction somewhere?

    What is the net effect of your loan balance from a month apart to compare

    if you have no offset on interest only loans, i would expect the 2 payments above to be the same amounts giving a net effect of $0.

    Would could happen too is the difference in money saved actually goes into the loan account which can be redrawn.

  • skinner on 09/03/2023 - 11:48

    This sounds a bit weird as if it's interest only you wouldn't normally make repayments. The interest should just get charged to a separate transaction account at the end of the month. Is it an extra direct debit/recurring payment you've setup? Best check with the bank.

    Either way the saving is in the interest charged each month. So you would either get charged less interest (with a normal interest only loan) or you pay the same repayments and your balance owing reduces more quickly (normal P+I).

  • alex el daghar on 09/03/2023 - 11:49
    +2

    either the loan is P&I or the offset is not linked to your home loan account or its a fixed rate loan
    no other option than these 3,call the bank and make sure its linked properly and its IO

    • mtr on 09/03/2023 - 11:59
      +1

      this. there is no mystery here. either you're paying off principal and you don't realise, or you don't actually have an offset account. no other option.

  • Hearthstone on 09/03/2023 - 12:02

    check your principle balance? has it gone down with the offset, the payment maybe the same but most of that going into principles

    so compare it before you have offset and after you have offset
    your principles should have gone down by the same amount of interest you save

  • Saul Goodman on 09/03/2023 - 12:03

    SOLVED - see update in description.

  • Summoner on 09/03/2023 - 12:04

    If you have interest only loan and have funds in the offset account linked to the loan, and the monthly replayment has not changed. Chances are that the part of your repayment was used to reduce the principal amount on the loan.

    If this is the case, you would notice some change with the total loan balance.

    Although it may not be commom practice, you can usually make extra repayment on interest only loan to reduce principal if you want to.

  • onetwothreefour on 09/03/2023 - 12:13

    Get the $200k into a HISA while you are waiting to refinance. If it's not reducing your loan interest then it's better that it starts earning some interest.

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