I’m not having much luck figuring this one out!
From reading other posts on the forum, I notice that people suggest it is better to have an offset account linked to IO loans. I have a split loan (small amount P&I, rest IO). I’ve previously been advised by my mortgage broker (who seems to have gone AWOL) that it is better to link the offset to the P&I portion because there is no penalty with how much I put in there, whereas if it is linked to IO there is a penalty after I put in more than 10k per year. I’m happy to pay the penalty if there is a more compelling reason for choosing this option. Can someone please explain the benefits of this (laymans terms please) so that I can make a more informed decision?I appreciate your thoughts.
The idea of an offset account is to reduce the interest you would pay on your loan. There are two methods of offset. One method is that the interest you would have earned on the offset is subtracted from the interest you would have paid on the loan for the same amount invested
Example $10K * 4% = $400 earned interest.
$10K * 8% = $800 to pay The interest payable is $400 on the 10k in loan, saving $400
The other method is the 10k is subtracted from the loan amount and reduces the interest by $10k * 8% = $800 saving in loan interest.Duckster Financial Services
http://www.ducksterfinancial.com
Helping to make the great Australian Dream come true !Comments are of a general nature and may not be relevant to your individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Check with the bank/ lender if on the P&I loan the offset balance cannot be more than the loan balance amount. IO loans will have a restriction on the amount you can offset or repay. If the interest is fixed you should be concentrating on getting the variable P& I loan down by using an offset. The reason for having a split loan is to have the advantage of the variable P & I
which allows you to be able to make extra repayments or offset the loan and thus reduce the overall loan amount.
Example $30,000 P & I loan , $30,000 Offset and say $300,000 IO. Interest P & I works out to 30K * 8% =
$2400 minus offset 30,000 = 0 interest charged on P & I
$200 a month extra would be paid off loan
$300k IO * 8% = 24k minus 30k * 8% = $2400 same saving of $2400 if allowed.
Check with lender or broker if the offset has to be less or equal to P & I loan amount !!
If P & I interest rate is greater than the IO rate you could save more interest on P & I and have the repayments flexibiltyI Am assuming the interest only is also a fixed interest rate
Duckster Financial Services
http://www.ducksterfinancial.com
Helping to make the great Australian Dream come true !Comments are of a general nature and may not be relevant to your individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
You may be confused due to another concept
The other main difference is the purpose of the loan
If the loan is for an investment you will have end up with more income earned from the investment property as the interest charged is less. due to the offset effect.
Income = rental income – interest – expenses
The increase in income means more tax will need to be paid or less tax deduction will be received if you are doing negative gearing.
As most investment loans are IO this may have caused confusion as the loans may have been all Interest Only rather than split with P&I and IO
If the loan is PPOR (Principal Place of residence)
The non deductible interest bill is now reduced by the offset.
As the PPOR doesn’t earn income and the interest is non deductible you do not pay tax but will save money on your home loan and thus pay the loan off quicker.
You might need to talk to a financial planner to explain and match the offset strategy with your needs if this doesn’t make sense to you.Duckster Financial Services
http://www.ducksterfinancial.com
Helping to make the great Australian Dream come true !Comments are of a general nature and may not be relevant to your individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by dee dee:I’m not having much luck figuring this one out!
From reading other posts on the forum, I notice that people suggest it is better to have an offset account linked to IO loans. I have a split loan (small amount P&I, rest IO). I’ve previously been advised by my mortgage broker (who seems to have gone AWOL) that it is better to link the offset to the P&I portion because there is no penalty with how much I put in there, whereas if it is linked to IO there is a penalty after I put in more than 10k per year. I’m happy to pay the penalty if there is a more compelling reason for choosing this option. Can someone please explain the benefits of this (laymans terms please) so that I can make a more informed decision?I appreciate your thoughts.
hi
I think your IO loan must be fixed. There is usually no restricitons on paying extra off a loan because it is IO, but there are restrictions if the loan is fixed.
Terryw
Discover Home Loans
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Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi duckster & Terry,
Yes, the IO is fixed for 3 years and the P&I is variable:
350k IO
62k P&IThis is for a negatively geared IP that we purchased last year in Perth (hence the unfortunate -ve situation). Our loan is with the Commonwealth, mortgage advantage package.
So it seems that my mortgage broker was right with his advice based on the scenario you gave duckster? If I am understanding this correctly, it is better for me to link the offset to the P&I to reduce the overall debt (provided I don’t put in more than 62k) because the IO is fixed. As mathmatically challenged as I am, I will try to do the figures:62k x 8% = $4960. Would that work out that an extra $400.00 per month would be paid off the loan?
I guess the other forum posts I read were all based on variable IO loans, but the rules are different for me due to the way the loan is structured?
We don’t have any other debts like cars, credit cards, PPOR etc. I do have a HECS debt which I’m accruing for the next 18 months though.
I meant to say the loan is with Colonial.
Dee your MB must be a glutton for punishement if he has placed the loan with Colonial.
Post sales service si not one of their strong points unless of course you try and move to a better deal and then they want to be your friend all of a sudden and not let you go.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
Thanks for your point of view Richard. Back in July last year when the house stuff was happening I visited with 2 mortgage brokers. They both came up with the same lenders for recommendation, Westpac & Colonial. Having never ventured into the world of IPs before, I figured I was doing myself a favour by getting someone more experienced to find me the best lender. The MB I went with suggested that with the Colonial package, I could refinance/restructure? the loans without incurring hefty fees for future investing, so basically for flexibility. I am still at the early stages learning, considering that I know I cannot navigate the world of lending institutions with ease at this point. Perhaps this comes with experience?
What I’m trying to do at this point is figure out ways to reduce the debt smartly so that we don’t drag our heels as much in the future due to bad decisions made earlier on. I was thinking an offset account may be the way to go, which is why I would appreciate the opinions of others (like yourself) who are far more experienced than me.Hi Dee
Dont get me wrong i throughly concur with the 100% offset principal and many of my client split their loans so they can have a portion of fixed and variable linked to the an offset account.
I guess i was just commenting that i think Colonial have one motive in life and that is to be as unhelpfull as they can to clients and ensure that they have tied your properties up as tightly as they can so you can’t ever go anywhere else.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
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