Offset Loan

A friend said he tried to organize an offset loan with NAB on his PPoR

The loan is P&I and they told him that having funds in the offset loan wouldn't result in lower monthly payments, the loan would just reduce faster

He's confused as am I

I thought that if you had a loan for $100k and you had $25k savings in a 100% Offset loan, that interest would just be charged on $75k as the $25k is now offsetting the loan?

 

The P&I monthly figure is probably set as a $ value. The offset amount will reduce the I component. So the loan will be paid off quicker.

 

For an IO it reduces the repayments.

For a P&I loan that's likely correct, what he's been told. It offsets/reduces how much of the loan value that the interest is calculated on. The example numbers you gave are correct. They'll keep his monthly repayments the same, and hence be paid off sooner.

 

Third time fullylucky - interest is charged on the $75k but repayments are set for the $100k so more goes against the principal, the result is less interest is charged and the term reduced.

 

That is correct. Interest is saved but monthly repayments will remain the same.

 

This confused me with my first loan (well, only loan)... I thought the repayments would be less because I was ahead in repayments... When in reality the interest charged reduced and the 'savings' of interest it then used as a principal repayment.

 

What is the best way to have an offset loan against your PPOR then?

 

Depends on circumstances, changing to IO with offset is a good option for some

 

Yep - if you want the monthly payments to reduce, you'd go IO on your loan and pay any excess into the offset.