Offset account balance scenario - question

Hi all,

I was thinking about putting in place a a reasonable amount of funds to my offset account for a loan, but wanted to consider exactly how it would work. I am thinking through a few options scenarios. If you could help me answer below question that would be great.

Info below.

* Original loan amount I borrowed (at time of purchase) was $360,000 - this was around 2003.
* It was an interest-only loan from 2003 till around 2015. In 2015, I decided to make it a P&I Loan based on a 25-year loan term.
* I have $160,000 loan balance outstanding. I am now considering moving $160,000 to my offset account - if I do this, it means I won't pay interest on the $160,000 at all, and I only need to re-pay the Principal component of the loan - is this correct?
* Can someone please check above and also let me know exactly how much the monthly loan repayment would be based on the above scenario?

Finally, what happens if the offset account is higher than the loan outstanding - e.g. what if I put in $200,000 in the loan offset account, while the loan balance is only $160,000?

Many thanks.

 

Yes that is correct
The repayment amount will be the same as it is now, but no interest. This will mean it will pay itself off at a rapid rate - I worked out that a fully offset PI would pay itself off in 14 years - but this was at a higher rate (meaning higher repayments with no interest).

see
Loan Tip: If a PI loan was fully offset how soon would it be repaid? Loan Tip: If a PI loan was fully offset how soon would it be repaid?

If the offset had more in it than the outstanding loan there would be no extra affect. you might as well put the extra $40k into a savings account to get some interest.

 

The repayments are the same. Eg if the normal repayments are $1000 a month, made up of $250 principal and $750 interest, then the repayments would still be $1000 with the loan amount in offset but the interest would be $0 and principal $1000. So the loan gets paid out quicker.

 

Thanks Terry - this makes sense
However what if rather than keeping the same payments to pay if off sooner (i.e. reduce period of loan to 14 years), I simply wanted to minimize my monthly repayments assuming I still keep my original 25 year loan period? Using my example above, what would be loan repayments reduce to? B.t.w. will the bank allow me to choose if I want to do it this way?

 

Hey Firefly - I guess similar question I have for you - can I still opt to keep my original 25 year payment term, but simply reduce my monthly repayments with the bank? If so, what would be monthly repayment be based on my scenario of putting $160k in offset?

 

With some banks you can reduce the repayments as you become ahead in the loan.
ANZ is one that allows this. Westpac, AMP don't.

 

Thanks Terry - in the case bank allows me to reduce the repayments, how would i re-calculate the loan repayment to get the lower amount? Is there somewhere (maybe a website) you could point me to so I can calculate this?

Cheers...

 

It would show whatin payment is. Just reduce your payment to this and come back and repeat every 4 months or so

 

That is one of the benefits of I/O loans. Once the Offset fully chicks a loan, there is no repayment.

 

Yup, got it.
And just to verify, if I am on an interest-only loan, I have $0 repayments if my offset amount is identical to my account balance. Meaning the offset amount only needs to equal my amount owing (account balance), not the original borrowed loan owner - confirming this is correct?

 

Yep