'P/I with Offset' vs 'I/O with Offset' - Strategy / checking how repayments work

Hi all, long time anon reader, first time poster.


I was trying to get my head around 'P/I with Offset' vs 'I/O with Offset' (in case it matters, with AMP). I've highlighted the background + actual questions in bold (for the skim readers), the rest is for context.


So I have a PPOR Owner Occupied with 15K in redraw on a 30 year term P/I with Offset, a few years in now. Offset balance recently started exceeding what is remaining in the loan (why the redraw keeps nudging up). I don't have any investment properties, so I assume any tax deductions/opportunity costs are sort of moot/non-existent for my questions to follow.


Naturally this got me thinking. I am clearly not generating any interest from the loan each month, but I am still charged a contractual full P/I repayment that assumes the offset is empty, so in effect the loan has been paid down much faster than it should (by my estimate the loan be done in like 7-8 years sooner, because my offset account is now fully loaded, and the repayment on P/I is set/doesn't change, irrespective of what is in the offset account).



I was wondering, (Q1) if I switch to I/O and my offset account is fully loaded (i.e. exceeds what is remaining in the loan), would that in effect "pause" me paying down my principal (until such time I switch back to P/I)?

Or is I/O treated like a contractual repayment sort of thing like in P/I where you got to pay what they define anyways, even if the entire "interest" component was offset? Also, (Q2) are you allowed to fully offset on an I/O loan, or do they try and close your loan out from under you?



Now I understand that after the N years on I/O, the P/I repayments will be higher, as I presume they will be calculated on the balance of the loan outstanding over a time frame of (years remaining - years spent on IO), e.g. if years remaining at present is 28 and years spent on IO is 5, then I assume the repayments would be based on calculating it over a 28-5=23 year remaining period when the time comes. (Q3) Anyone know what happens to redraw at the end of the I/O period, I am assuming it doesn't disappear (i.e. stays at whatever it was).


Also makes me wonder: (Q4) if you do pay your loan down faster (whether on P/I or I/O), is there any way to request that future repayments be calculated on the current loan balance (I don't know what the terminology would be to ask) across the remaining time to go (rather than what the original loan balance was, however long ago that might of been). My gut feeling is this might be called a 'refinance', but I feel like a refinance is a heavy bloated way to achieve this, cause its not like I am asking for a new loan.


Why do I ask this? say at the end of the I/O period (or at some life event X), I decide I want to pay down the loan by 50k (for argument sake, as opposed to leaving it in the offset). Ideally then I would like the repayments then to lessen (because I have just made the loan go down 50k). or (Q5) I may one day turn this into an IP if I move, so I figure probably best to not pay down the loan now or is this a silly/misguided idea?

and

(Q6) Anyone know how long you can do I/O for? I was figuring perhaps sign up to a 5 year term, if I decide prior to then, could always switch back to P/I if wanted etc.




Hopefully this is not too basic of questions, I just figure some others might be in a similar situation, so I thought its a good strategy for cash flow (as long as you don't raid the offset as a piggy bank) and frees up cash in the case where its needed and leaves open the option for more tax deduction later if PPOR turns into a rental. I just want to make sure I have NOT confused something in my head.

I saw these threads

• IO loan with offset vs P&I
• IO and Offset vs. P&I

which make me think, maybe I am on the right track in terms of my thinking, but always good to ask, in case things have changed since then.




I will definitely go through my broker for whatever I decide! (to make sure there is a paper trail with the bank, as my last few interactions when I call the bank, they been trying to tell me that a redraw is same as an offset... they clearly need to update the phone scripts they read off, their bad info does my head in).


Thanks all ~

 

1. Yes

2. Yes you can fully offset an IO loan and there will be no repayments

3. The loan reverts to PI

4. Yes with some banks you can reduce the minimum repayment

5. Misguided idea possibly. It depends on the circumstances. Realistically could you keep this loan and qualify for another?

6. 5 years in the first instance, some can renew another 5 subject to servicing. Potentially can repeat the process by refinancing

7.

 

Thanks for the responses!

5. I could keep this loan and qualify for another if I wanted. To double check, I just put some values into a borrowing capacity website calculator, adding details about my current loan, etc. it says even if I held this I can qualify for about a 900K loan it appears. Maybe if something looks good, lots of areas tanking at the moment, maybe something interstate (which will also unlock negative gearing potentially).

 

I think generally it best to avoid paying debt back if you can - pay the minimum as you can always put money in an offset and save the same interest.

You might also want to consider splitting the loan and getting an IO portion which you can fully offset with no repayments - rate doesn't really matter. And a PI portion at a lower rate to save interest. Every 5 years or so refinance the PI portion back to 30 years to keep reducing the repayments and extend the IO portion, annd increase it to keep up with your offset account.

 

Thanks again!

What I was thinking of was (prior to your post) was put entire current loan to IO, have enough in offset to zero any interest from being generated. Approx rate of return is a safe 6.8-7% safe (since my tax margin is the 47%). Use whatever extra funds I'm now accumulating (above the offset account being full) and perhaps either look at an IP or shares (I was leaning more to shares), since I don't like the buy in/out costs of property. But the latter, whether IP or shares is still speculation in my mind at this point. I psychologically just wanted to get to the point where I if I wanted pay the entire PPOR off in one hit I could (but I won't, I'll rather leave it in the offset for now), partly until I can make up my mind on what to do next.

 

Look for my post on how storing large sums of money in offset accounts could actually cost you more than you think.

 

Interesting you mention that, is the other tab that's current open in my browser (for others: Strategy: Don’t Keep Large Sums in Offset Accounts)

 

You got great tax tips (still getting my head around them), since I mentioned shares, I see that Tax Tip 59: Borrowing to Buy shares is likely more applicable to my risk profile. Cheers - your an asset to the community!

 

100% agree! Too many people make this mistake but the maths works the same as Terry has said - it's just that you can use that cash for private or investment purposes without it changing the deductibility of the remaining debt if you use it for private on an offset "redraw" as opposed to a loan redraw.

I have a few of my IO loans fully offset so there is no payment each month.

- Andrew