Forums / Getting Technical / Finance / Interest Amounts Vary on IO Account?

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  • Profile photo of IntrigueIntrigue
    Member
    @intrigue
    Join Date: 2010
    Post Count: 208

    Hello there,

    I have always been a little confused about why the interest deduction each month on my PPOR loan varies so much. None so much as now. I have a PPOR loan IO with an offset account.

    As the loan is IO the loan amount never changes. The interest rate has not changed over the past two months so that should be the same. the offset account is where I park my payments + extra. The extra is the same amount all the time so is just gradually increasing the offset balance, thus no dramatic shifts of money in or money out. (the only money out is the IO loan payments and the only money in is the same monthly payment each month)

    Why would it be then that in April my loan interest deduction was $1672 and in May $1845?

    I would have thought that if all stays the same and my offset is slowly growing then the interest I pay should be reducing not increasing?

    Profile photo of keikokeiko
    Participant
    @keiko
    Join Date: 2008
    Post Count: 513

    The bank calculates the interest on a day to day basis

    I am thinking your loan is for about $300,000

    Say if your paying 7% x $300,000 = $21,000 p/a divide $21,000 into 365 days $57.53 per day, have a look at your bank statement and count the amount of days between payments. so say if it was from 18/04 to 20/05 this equals 32 days x this by $57.53 = $1,840.96. you will need to use your exact interest rate and amount owing to get the exact figure that should be leaving your account each month

    Profile photo of IntrigueIntrigue
    Member
    @intrigue
    Join Date: 2010
    Post Count: 208

    Thank you Keiko

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Keiko is correct with most lenders however i haver seen a couple of the smaller Credit Unions charge interest on a Quarterly rest rather than daily basis so will depend on who the loan is with.

    Also many lenders work their offset differently so not to straight forward there.

    And they wonder why clients get confused.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of IntrigueIntrigue
    Member
    @intrigue
    Join Date: 2010
    Post Count: 208

    Thanks Richard. I  just want to be sure they are working it out correctly and not making mistakes that are costly to me… too often their mistakes cost me (or their customers) money.

    I am with NAB by the way.

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hi Intrigue,

    It's all good. People tha have a principal and interest loan have exactly the same situation – there interest varies depending on how many days are in the month and what day it is charged on (depending on weekends/last day of month) but as their repayments are 'contracted' the same amount each month, they usually don't see that the interest amount varies – as they pay the same amount each month, but some months more of it is principal than other months. You would be amazed how many find the concept of interest only a bit 'tricky' if they have only had P&I loans before.

    Cheers,

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