Basic offset account question with variable IO

Discussion in 'Loans & Mortgage Brokers' started by tattoo, 1st Oct, 2018.

Join Australia's most dynamic and respected property investment community
  1. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    I have a variable, interest only loan with an offset account. A decent amount has been put into the offset amount recently. The monthly repayment amount has not changed.

    I thought the monthly repayment amount would reduce as the interest due each month is calculated on the net loan. ie. 400K loan, 100K in offset. The IO rate applied to 300k, monthly portion calculated and thats the repayment. And so monthly repayment amount can change based on the amount in the offset ?
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    4,401
    Location:
    Melbourne, Nationwide
    Which lender is it with and are you sure it's interest only?
     
  3. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    3,454
    Location:
    Canberra, Brisbane and Sunshine Coast
    If the repayments are IO then the monthly interest should reduce according to the amount of savings sitting in the offset.

    I’d be interested to know which lender this is too. Sounds a bit strange.

    Cheers

    Jamie
     
  4. House

    House Well-Known Member

    Joined:
    13th Sep, 2015
    Posts:
    915
    Location:
    Sydney
    Have you checked the offset was actually linked to the account?
     
    Perthguy likes this.
  5. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    6,505
    Location:
    Brisbane
    This happened to us. Never was linked.
     
    JohnPropChat and Perthguy like this.
  6. Phantom

    Phantom Well-Known Member Premium Member

    Joined:
    24th Jun, 2015
    Posts:
    2,055
    Location:
    Sydney
    Shouldn't be too hard to figure out why this is happening. Few things to look out for:

    1. Are you certain the account you are putting funds into is a real offset?
    2. Is the offset linked to the loan account?
    3. Are you sure you put enough into the offset that if would make a noticeable difference to the interest calculated?
    4. Who is the lender?
     
  7. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    Is it St George?
     
  8. Aaron Sice

    Aaron Sice Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,448
    Location:
    Ocean Reef, WA
    Careful it's not a basic redraw facility. You may have already lost the funds.
     
  9. Redom

    Redom Finance Strategist Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    1,778
    Location:
    Sydney (Australia Wide)
    My guess is it’s not linked. If so, talk to the bank to link it and ideally request refund of overinterest charge.
     
    Terry_w likes this.
  10. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    Hi everyone,
    Thanks. I'll reach out to them. I've put in about $130K in last month and half, so I'd say that is enough to expect a reduction.

    Its with Pepper Money.... so it is an 'offset' account i'm paying a monthly fee for. But from the posts in the forum recently, it sounds like this is a glorified redrawal facility =(
    I think the accounts are linked in some way because the calculated monthly 'interest' added onto the loan each month has decreased. But the repayment amount has not changed. Feels like P&I arrangement, but the loan details says it is IO variable and the repayment amount is inline with the online calculators on IO.
     
    AlbertWT likes this.
  11. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    I think it might not be an offset account.
     
    Zoolander likes this.
  12. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    5,302
    Location:
    Perth WA
    Some non-banks have quirky offsets that don't always work in the way you expect, so if it's Liberty/Pepper or someone like that, that could also explain it. The payment may not change, but the principle may get paid off instead.
     
    AlbertWT likes this.
  13. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    I'll clarify with them, but this means its not helping my cashflow at all ( in the short/medium term). Would I be better off redirecting it to a P&I loan offset account (one of the big 4s)? Its got a lower IO rate by about 0.04%. Or will that not reduce the monthly repayment either, but will increase principal paid off?

    sigh rookie mistake
     
  14. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    that won't reduce your repayments either but will decrease the amount of interest and increase the rate at which your loan is paid off.
     
    tattoo likes this.
  15. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    so yeh confirmed thats what it does, they call it an 'offset subaccount". There was a footnote in the T&Cs in the final sign off doc.

    hope other ppl take that on board and not make my mistake. Shouldn't have taken the broker's word for it and read all the details
     
    New Town and Terry_w like this.
  16. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    4,401
    Location:
    Melbourne, Nationwide
    Pepper isn't a deposit taking institution, so their offset account isn't quite the same as an offset account from a first or second tier lender. I don't know about Pepper's facility specifically, but it wouldn't surprise me if they simply take a set amount and if you've got money offsetting the loan, then the surplus beyond the basic interest becomes a principal repayment.

    People often ask why some brokers don't like non-conforming lenders unless there's no alternative. It's because they often have little quirks or surprises in the fine print. Thinks like this.
     
    AlbertWT and [email protected] like this.
  17. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    woooo so just to correct misunderstanding, it does help cashflow but in a roundabout way
    the monthly repayment does not change. But, there is a 'credit' for the interest saved that can be 'redrawn'
     
  18. mja

    mja Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    198
    Location:
    Sydney
    I just settled on a loan with Pepper, and it has one of these 'offset' sub accounts (which I'm not going to use). See attached:

    "Note - when an offset sub-account is linked to an 'interest-only' loan, the minimum monthly repayment amount does not change regardless of the balance of the offset sub-account."
     

    Attached Files:

  19. tattoo

    tattoo Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    72
    Location:
    NSW
    Thanks, yes I found this after the fact. But although it doesn't change the monthly cash payment. The interest 'saved' becomes available for withdrawal, so it does help cashflow.
     
  20. Zoolander

    Zoolander Well-Known Member

    Joined:
    15th Dec, 2016
    Posts:
    632
    Location:
    Sydney
    If Peppers works like Liberty, you'll need to call them up to ask for a manual repayment calculation- a staff member eyeballs your money in the offsets and calculates what the lower repayment should be. These smaller online only lenders aren't as tech savvy as the big 4