Basic offset account question with variable IO

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 ?

 

Which lender is it with and are you sure it's interest only?

 

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

 

Have you checked the offset was actually linked to the account?

 

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?

 

Is it St George?

 

Careful it's not a basic redraw facility. You may have already lost the funds.

 

My guess is it’s not linked. If so, talk to the bank to link it and ideally request refund of overinterest charge.

 

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.

 

I think it might not be an offset account.

 

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.

 

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

 

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.

 

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

 

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.

 

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'

 

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."

 

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.

 

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