Hi Guys, I hope everyone is fine and well. I just have one question in regards to home loan repayments. For example I purchase a property worth $600,000 with a 20% deposit borrowing $480,000 on a 5.5% interest only loan making my repayments Aprox $2200 monthly. Say a year later I receive $100,000 from gift or inheritance and I want to put it towards my property. Would I be able to change loans and add that extra $100,000 towards my property so that my monthly repayments would be less? because wouldn’t it be stupid to just add that $100,000 towards that loan as I would still be paying the same repayment? I hope this makes sense any feedback for the newbie would be great.
Cheers
Hi ROnnie,
Mate, you need to read up about “Offset Accounts” (the greatest thing since sliced bread :p ) In a nutshell, if you get a windfall, pop it into the Offset. While it sits in that account, it reduces your Interest Bill by the amount in Offset (effectively “paying” you Interest of 5% WITHOUT it being taxable – cf savings account).Once you decide what to do with that windfall, just withdraw it (no bank application, as per redraw – no drama, it is YOUR cash). The property mortgage that was being Offset now charges you more Interest again – and, if an IP, the mortgage IS deductible.
There is a reference within THIS link :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Go check it out (look for a post about “Offsets”)
Benny
Hi Benny,
Thanks for your reply, oh WOW so are you saying Benny using my example above, If I dumped $100k into my offset account My repayments would be reduced from $2200 monthly? If I did not have a offset account and just payed the $100k to my loan would I just be paying the same repayments of $2200? I hope along the lines somewhere this is making sense, I do apologise.
Thank you
So long as the loan is interest only, the repayment will automatically adjust to the net figure achieved against any offset account balance.
Almost universally a superior option, especially if its a principle place of residence which you may turn into an investment property.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Hi Corey,
Oh wow that is great news. So if I somehow acquired $480,000 loan balance amount and put it into the offset would that mean I would pay zero repayments? Am I somehow on the right track haha how come not many people know about this, most people I talk to just tell me principle and interest so that way you can pay off some of your home, but that way always made me think there must be a better than paying your mortgage for 20+ years.
Thanks heaps
That’s correct Ronnie. This opens options for flexibility in taxation and lending options.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Am I somehow on the right track haha
Hiya
Is your loan set up as interest only or principal and interest at present?
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hey Jamie,
At this stage I don’t have any loan, but just above I was referring to interest only loan as the guys mentioned that above.
Thanks
So long as the loan is interest only, the repayment will automatically adjust to the net figure achieved against any offset account balance.
Could you give me an example of this Corey? Cheers mate
Hi Ronnie,
What Corey means is this :-
You have a $480k mortgage on a property. Mortgage is Interest Only, and you have an Offset account against the Loan. Loan repayment is 5%, so $24k per year or $2000 per month in Interest to be paid.You put your salary into the Offset, live off your Credit card for the month, then square up with cc once a month (thus pay no Interest on the cc). A fair chunk of your salary remains in the Offset for much of the month, reducing your interest somewhat, and thus reducing your Interest payments.
THEN, you get a $100k windfall. Put THAT into Offset, and immediately the $480k loan is “offset” by $100k, bringing the amount you pay interest on down to $380k. From that point on, Interest is $19k pa, or $1584 per month instead of $2000. Sound like what you want, Ronnie?
All these Broker guys on here know and love Offsets. Just have to make sure they get set up RIGHT when starting out.
Benny
Hi Ronnie, What Corey means is this :-You have a $480k mortgage on a property. Mortgage is Interest Only, and you have an Offset account against the Loan. Loan repayment is 5%, so $24k per year or $2000 per month in Interest to be paid.
You put your salary into the Offset, live off your Credit card for the month, then square up with cc once a month (thus pay no Interest on the cc). A fair chunk of your salary remains in the Offset for much of the month, reducing your interest somewhat, and thus reducing your Interest payments.
THEN, you get a $100k windfall. Put THAT into Offset, and immediately the $480k loan is “offset” by $100k, bringing the amount you pay interest on down to $380k. From that point on, Interest is $19k pa, or $1584 per month instead of $2000. Sound like what you want, Ronnie?
All these Broker guys on here know and love Offsets. Just have to make sure they get set up RIGHT when starting out.
BennyThanks a lot Benny, I totally understand now! so using your example above, If I were to just have a principle and interest loan and no offset account and had dumped the $100,000 to my repayments nothing would change, my repayments would still be $2000 per month the only thing would change would be the loan term reduced in years, is this correct? I think I am getting the idea of it now, why doesn’t everyone use offset accounts when setting up there mortgage?
Hi Ronnie,
If I were to just have a principle and interest loan and no offset account and had dumped the $100,000 to my repayments nothing would change, my repayments would still be $2000 per month the only thing would change would be the loan term reduced in years, is this correct?
Sounds right to me !! And, if you wanted to get it out again, a whole new application, etc…..
I think I am getting the idea of it now, why doesn’t everyone use offset accounts when setting up there mortgage?
Why indeed? But then, this stuff is not taught in school, and, if your parents were not involved in IP’s, where would you learn it?
A good question for the Mortgage Brokers might be “Why don’t Banks promote Offset? Is there more in it for them by pushing people toward Redraw?”
Benny
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