What happens when offset is 100% full on a P&I loan?

Discussion in 'Loans & Mortgage Brokers' started by C-mac, 4th Feb, 2019.

Join Australia's most dynamic and respected property investment community
  1. C-mac

    C-mac Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,049
    Location:
    Sydney
    Hi folks,

    Got a question for the lending/finance guru's if you don't mind.

    Its a hypothetical but essentially I want to know what happens when one has a P&I loan that was fixed, and then switches to Variable, and THEN deposits a chunk of cash into the Offset account sat against the mortgage (and by a 'chunk', I mean 100% of the entire mortgage amount!).

    Here's a fictitious example to help illustrate the question further.

    One has a Variable Principal & Interest loan of say $400K (which currently has an Offset facility, yet with $0 in the Offset).

    For simplicity's sake, lets say the current monthly repayment is roughly $2,000.00, which is composed of (roughly):
    • Interest: $1,300.00
    • Principal: $700.00
    If one was to right away deposit from another bank, the full $400K of savings they have, into this Offset account attached to the above P&I mortgage; in this situation, would the bank:

    a) continue deducting the full $2,000.00 monthly repayment (which means that the loan would be paid out about 8 or 9 years earlier than the current term-duration; since 100% of every chunky monthly payment goes to principal, and $0 of it to interest. I cannot imagine the bank liking this setup as they earn very little interest from the customer over the entirety of what is also a shorter loan period), OR,

    b) will the lender instead do a re-adjustment at the time they see a 100% full Offset account, and then reduce the monthly repayment to just the 'principal' portion ($700.00 in this fake example); because they still need the loan to pay-out slowly over the ~ 29-year remaining loan term? This sounds like the more logical option for them to take, no?

    Building on 'b' above... if one deposits and withdraws random amounts/odds-and-ends each month (e.g.... $5K in, $10 out, $7.2K in, $4.4K out etc. etc. - all the time, like 5 times per month!), from their Offset account, will that then be a LOT of work forever more for the bank to do? Since, they'll constantly be needing to re-calculate the 'principal' portion and (teeny tiny) interest portion in the scheme of the remaining 29-year loan term, all the time?!


    PS I realise a simple call to my lender could answer this for sure, but I have my reasons for *not* asking them as it will alert them in advance to my possible intentions.

    Many thanks!
     
  2. Redom

    Redom Finance Strategist Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    1,776
    Location:
    Sydney (Australia Wide)
    a. Loan will be paid out far quicker than your original loan term. As you've said, all of the monthly repayment goes to principle. The monthly repayment figure remains the same independent of whats in your offset, its allocation goes 100% to principle reduction.

    In general, I guess that lenders don't really like 100% offset loans as they don't earn interest revenue either way.
     
  3. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    Redom likes this.
  4. C-mac

    C-mac Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,049
    Location:
    Sydney
    Thanks Redom, interesting that it'll be option A and not b. I was hoping for cashflow reasons they might just reduce my monthly payment to the Principal amount only and not the interest, oh well, good to know.

    PS - thanks for your great comments the other day on the big podcasting shows! Very sensible 2019 predictions for lending. I guess we'll see what the RC outcomes this arvy bring us.
     
  5. C-mac

    C-mac Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,049
    Location:
    Sydney
    Thanks Terry for that link too!
     
    Terry_w likes this.
  6. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,621
    Location:
    Qld
    We eventually paid off all our P&I loans this way.

    Deposit into the offset account until it finally reaches the same amount as the outstanding loan. Set up monthly payments to transfer from the offset account to the loan. The balances in the loan/offset stay the same, reducing each month until the loan is paid off.
    Marg
     
    Terry_w likes this.
  7. James Bond

    James Bond Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    115
    Location:
    Melbourne
    This is what I have done too. You can forget about the loans in effect as you're paying no interest at all so long as the offset $ always equals or exceeds the loan $.
     
    Marg4000 likes this.
  8. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    But you have to consider is this the best use of the money?
     
  9. MikeyM

    MikeyM Member

    Joined:
    2nd Jun, 2017
    Posts:
    14
    Location:
    Melbourne
    If this same scenario existed but half the loan was offset (variable interest rate) and the other half was standard (fixed interest rate) what would be the best use of additional funds over and above the offset amount.
    E.g offset amount of 250k is complete. However all additional money is now free for use.

    Should the standard portion of the loan be paid down with extra funds or should one go to the bank to renegotiate the offset value of the loan to the full 500k?
     
  10. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    20,280
    Location:
    Remote
    This is a personal decision. Some would like to break the fixed loan and offset, others would wait it out, others would invest elsewhere.