Hi guys, Is there any problem with having an IO loan with an offset and then just putting as much into the offset as possible? For example I own a property with $159K debt and have $100K in the offset. If I just put another $59k into the offset is that considered to be the same as having the loan "paid off"? Just trying to understand what will happen when my IO loan clicks over to P&I Thanks! Rob
No issue with that strategy at all, may make sense when you have a large % in offset as the repayment difference will be bigger between IO and P&I. For IO loans, the monthly repayment is the net balance (so 59k X interest rate / 12). For P&I loans, repayment amount is the same, regardless of whats in the offset account. The amount in the offset account will reduce the interest component of the total repayment, meaning a greater share of the repayment is going to principle. When the repayment swaps on a fully offsetted loan, the loan balance will begin falling every month and there'll be a 'repayment' increase. I.e. it will increase from 0 to its scheduled repayment amount. The repayment amount will be 100% principle reduction with no interest charged (100% offseted).
With IO as the offset fills the repayments will decrease and once the offset equals the loan there will be no repayments at all. Once it converts to PI it would then pay it self off over about 14 years assuming no additional repayments or money removed from the offset. This may or may not suit your needs, but is something to be aware of.
Pumping IO offsets, especially on an investment loan with the highest interest rate (had 5.2% at one point) is a legit tactic. Means you can pay jack all repayments for 5 years. Never got a call from the bank or anything. Used that to minimise interest, and save up a fair bit before ticking over to P&I. Eventually though the principal will need to be paid back but its a handy savings accelerator early on.
Not all lenders have the IO thing right . Interest based lenders like Pepper have PI repayment regardless of whats in the offset. if the loan is fully offset, the thing still asks for a full P&I repayment and reduces principal quite fast since there is no Interest, the same as described by the learned folk above when a loan reverts from IO to PI with most other lenders. STG used to have this same hassle for a while as did ABL. ta rolf
So, for instance loan ticks over to P&I and fully offsetted, using only the amount in offset to pay back. Does the borrower need to top up offset or will the full offset be enough for the remainder of the loan term? i.e.: after 1st month offset is now less by 1 payment, but so is loan. But still enough ?
