How do offset accounts work

Discussion in 'Loans & Mortgage Brokers' started by Chotu, 2nd Jan, 2020.

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  1. Chotu

    Chotu Well-Known Member

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    Hi

    If i have a loan with P&I payment, lets say on a hypothetical amount of 600k.
    Assume my P&I repayment is 3k a month and i have 100k in offset. Then the bank should charge me interest on 500k.

    Would my monthly repayment be less then 3k (on 600-100=500k) or would the repayment still be the same, but interest reduced and the principal paid be considered more?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Monthly payments won't change on PI.

    What will happen is the loan will reduce quicker because the interest component of the repayment is less.
    With some banks you can constantly decrease your monthly repayments to lessen the speed at which the loan is paid back, e.g. ANZ, with other banks you cannot, e.g. Westpac.
     
  3. Chotu

    Chotu Well-Known Member

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    Thanks, on this reduced balance, can i redraw the extra principal i have paid off any time? Assuming there is both a redraw and offset facility on the loan account?
     
  4. Chotu

    Chotu Well-Known Member

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    so then wouldn't it be a better to keep the loan interest only and just pay a reduced interest for first 3-5 years if i plan to save and increase the offset savings?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Loan Tip: Redraw on a PI Loan Loan Tip: Redraw on a PI Loan
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends on the circumstances. If the interest rate was the same it might be better.
    If lower for PI perhaps not.
    Cash flow and plans are important too
     
  7. significance

    significance Well-Known Member

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    The nice thing about offset accounts is that all your money can be working to reduce your interest until you spend it. Have your salary paid into the offset account. Interest is calculated daily, so even if you spend every cent before the month is out, you are still paying less interest. Even better if you combine it with a credit card with an interest free period: do all your spending on credit, get the benefit from cash sitting in your offset account until you pay it back by direct debit from the offset account up to 45 days later.
     
    Last edited: 4th Jan, 2020
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