Offset Acccounts

Hi Nos1,

My understanding of offset accounts….

"an off set account on a an IP loan actually pays off any of the loan"
No it does not pay off the loan balance. Its more like a savings account that (as the name suggests) offsets the balance of your loan when paying interest.

"does it just reduce the monthly repayment?"
It reduces the amount of borrowed money that you pay interest on. Your minimum monthly payment does not change.
eg. $200k loan, $40k in offset account, you pay interest on $160k (the loan balance remains $200k.)

I am no professional so someone could perhaps confirm/expand?

Pete

I’d like to come in here and get some clarity, if I can.

I have a $200k loan against my IP. I have $50k IO fixed and $150k variable offset.
I believe I am personally responsible for interest rates going to 9% in 08 – this coincided precisely with me stretched to the max.
I have been throwing money at the loan to get it paid right down. I like a lot of equity in my properties.
I chuck $2k to $4k a month off the loan and now have it reduced to $62k with $80k “available”.
I have about $1k in the offset account.
I am able to move money back and forward between the loan and the offset.
I have never been able to work out whether I am better off throwing money at the “loan” side or keeping the money in the “offset” side.
I did ask the bank, and while they were incredibly helpful and positive – I was neither better informed or any wiser.

So am I better off throwing money to reduce the loan ASAP OR keeping the money in the offset?
Like – taking the $80k out of the loan and putting it in the offset, which would then offset $140k?

I agree.

You can take money out of a loan at any time – if the product allows it – but whether you can deduct the interest on this portion will depend on what it is used for. I would suggest you not pay extra off the loan but keep the money in the offset as it will save the same interest but with less tax hassles.

You do pay off the loan if you have a P & I loan with offset but if IO will merely reduce your interest repayments.

Remember the balance in your offset account is building up and up and nothing to stop you transferring the lot over to the mortgage account and reducing the loan balance immediately. Not necessarily recommended but can be done.

Rudiga

Personally i would never put additional money directly into the loan account and would always utilise a 100% offset account.
Remember what starts off as your PPOR may one day become an IP and you need to have flexibility on your loan.

Any funds you redraw from the loan through extra payments are only Tax deductible if the funds are used for investment.

In essense the saving is identical but from a Tax perspective they are a miles apart

yep understood the whole tax part…………but you just cleared the whole saving interest part for me, thanks again

Interesting discussion. I have been a fan of offset accounts for several years, however our new MB thinks they are somewhat over rated. Does having a few grand in an offset account really make any appreciable difference to a loan? Particularly if the interest  paid to the offset account is less than the mortgage account. Any thoughts?

or maybe the broker is promoting non bank lenders who don't offer offset accounts.