How does repayment work for P& I Home Loan when you have an offset?

I am trying to work out whether it's better for me to switch to P&I from an IO loan for my PPOR.

If the repayment on $400K loan is approximately $2500 per month and you have $100K in the offset account do you pay Principal + Interest on the $300K? (which is less the interest on $100K) Or does having an offset account simply mean that the repayment period becomes shorter because you still repay $2500 per month?

 

Yes repayments are the same. The interest charged is only on the mortgage balance minus offset so more of each payment comes off the principal, therefore making loan shorter.

 

Lets say you have a debt of 200k and an offset of 200k. Paying P&I is essentially just moving money from the offset to pay it off.

With people saying that IO is being harder and harder to get, do you think it would always be available to do IO in this situation or do you think they would still force you to stay in P&I?

And if they will force you to do P&I, is it possible to reduce the payments amount somehow if you wanted to maintain the offset?

 

The payment is based on the loan term, interest rate & amount borrowed. Where the money comes from is personal choice ie new funds or offset.

@Anthony Brew The only way I'm aware to reduce payments is to refinance:

1. lesser amount than original mortgage due to principal already paid but over new longer term ie. If 5 yrs into a 25yr mortgage then refinance remaining amount at 25yrs again

2. At a lower interest rate.

Or, if ahead on payments (not offset but extra off principal) you can request a temporary repayment holiday commensurate with amount you're ahead.

As for future availability of IO loans.... who really knows other than it seems to be getter harder & harder these days.

 

Thank you very much for your response. It's going to help me as to how to break up my loans.

Also can someone help me with the calculations for the below scenario?

I am currently paying about $14,000-$15,000 per year (or somewhere between $1150-$1300 per month) in interest only loan to CBA because I have about $100K sitting in the offset. The current interest rate is 3.97%. From 8 May there will be an increase of 0.25 which will effectively make my repayments $73 higher per week with this amount in the offset. Or I will be paying $3800 more in interest per year.

So, what I am trying to work out is, if only 0.03 for P&I loan I may fix all or part of my loan to make it equivalent to the new payment and apportion the new increase to the principal.

However, my issue is, if I convert the whole amount to P&I, it will be too much for me to adapt to change because it is almost double my current payment. The amount which I can pay per month comfortably will be up to $2000-$2200.

My original loan is $500K and if the balance in the Offset is $100K the repayments are as follows when P & I interest is 4% and IO interest is 4.22%

$500K P & I Repayment $2,527 ==> repayment period reduced by extra money in the offset. I don't know by how much.

$400K P & I Repayment $2,021 ==> + IO repayment $0 since I have $100K in the offset. Debt paid off in 27 years.

$300K P & I Repayment $1,516 ==> + IO repayment on $100K (@4.22%)$352.
Total repayment $1,868
Amount of Principal repaid in 1st year: $6840

$250K P & I Repayment $1,264 ==> + IO Repayment on $150K (@4.22%)$528
Total Repayment $1,792
Amount of Principal repaid in 1st year: $5700

$200K P & I Repayment $1,011 ==> + IO Repayment on $200K (@4.22%) $704
Total Repayment $1,715
Amount of Principal repaid in 1st year: $4560

If I remain on IO my repayment will be $1,334 per month I think I would be getting better if I split the loan and try to pay the Principal off.

 

You could extend your loan term back to 30 years to make the repayments lower. Periodically ring up the bank and ask them to reduce the loan payments - you should be able to do this because you will be paying the loan down faster so if they recalculate the minimum repayment needed to pay off your loan it will be lower each month. perhaps do this every 6 months.

IO loans are going to be restricted for LVRs over 80% soon - not available.

 

You might want to check your calculations.... 25 basis points is 0.25% which is 0.0025.

So $500,000 × 0.0025 = $1250 /yr

Unless your loan is a bit over 1.5M you won't see a $3,800 /yr increase in interest.

 

I have a $375k loan on my PPoR set as interest only. With the 0.25% increase in Interest-only loans that is an additional $925 per year.
Do you guys think i should just absorb this or change it to I&P.
If i keep it as IO and i ever decide to change this house into an IP it will maximise my interest deductions. Also it gives me more flexibility to have the funds in the offset account.
But then Do i want to pay nearly $1k extra a year to the bank?

 

You have to consider how likely is it that the property will ever be rented out. Also consider the possibility of whether you do move into a new main residence how likely is it that you will be able to afford to keep the existing one as a rental. And then consider whether these possibilities are worth paying $1000 per year for.