Given these T&C's: do I get any benefit from paying extra into my loan vs using offset account?

[icecream543791]

Hello, I asked the bank about paying extra off my loan on top of the minimal fortnightly principal and interest payments and they responded with the below quoted text. Honestly I don't understand the second point. I already have an offset account that lowers the interest I pay on the loan.

Pretty much I just want to know, is there any benefit for me making extra repayments towards my loan? If its not going to impact the principal value and only affect interest then there's no point in making extra repayments right? I should just keep it in my offset account. Or am I missing something?

A couple of things to know when putting additional funds into your loan:

- Of any additional funds, we are required to hold 1 month repayment, the rest is shown as available for redraw.

- Any addition funds transferred to your loan, will reduce your loan balance for interest purposes but the funds do not come off the principal and your loan repayments will not change.

 

[dpardue]

@icecream543791 offset is the same for most situations and all upside for some if you have it.

If you are paying for an offset is the only time it's not just the best.

 

[judd04]

@icecream543791 All it's saying to you is that you can't redraw beyond where you'd be if you didn't put it in, just paid the monthly repayments and that it's not changing the rate you're repaying at.

There's no real reason to pay it off if you have an offset. If you don't (like me) then you'd do this.

 

[justtrying]

@icecream543791 Put simply, money in the loan account belongs to the bank and money in the offset belongs to you.

The bank can at any time change the terms of the loan such that you can’t have what you think is “your” money, because it isn’t actually yours when it sits in that account.

 

[icecream543791]

@justtrying Thanks, re your last paragraph are you referring to the money in the offset account or the other loan account?

 

[justtrying]

@icecream543791 The money in the loan account belongs to the bank. In theory they have no obligation to give that money to you (though in practice many banks let you redraw it without penalty).

But as an extreme example, if a bank had a liquidity crisis, they are perfectly entitled to just take that money as their own.

 

[lindseym1013]

@icecream543791 Yes you still benefit, this is standard stuff

In simple terms, putting more into your loan or offset doesn’t reduce your loan balance and therefore min monthly payment.

 

[jezzelaine]

@icecream543791 By definition offset also has no impact on the principal, so while they are technically correct it's really just semantics in how they explained it to you

All else being equal though, offset is better for a couple of reasons;

• If you set the loan up as an investment loan there can be implications on deductibility if you use redraw funds
• The bank may change the terms on how you access redraw, while offset is simply funds sitting in an at call account

 

[desertfox]

@icecream543791 Not come off your principal, thats an odd way to put it.

Loans have a generally hidden figure, schedule balance, this is what your balance should be if your followed the normal repayment schedule, this is what sets if you are in front or behind. You cannot change your scheduled balance. But the difference between your principal and schedule balance will drift over time with offset and redraw balances as the interest will reduce.

Redraw vs offset is identical cost wise only 2 main differences.
1) the bank could shrink the redraw into your balance (unlikely)
2) if you ever want to convert it into an investment property then redraw MUST be used for investment purposes, doing otherwise will contaiminate it for tax purposes.

 

[fadingwest307]

@icecream543791 If you want to reduce your monthly loan repayment then you need to "cancel redraw". That's what my bank calls it. Your bank might call it something else.

Say you have $10K. you can leave it in your offset and your monthly repayments remain the same, you are just paying less interest and more principal with those payments, same as if you pay it off the loan and just leave it there.

However, if you "cancel redraw" then your monthly loan repayments will decrease. You can choose to keep paying the same amount which means you are paying more principal. or you can pay the reduced amount and spend the rest, or put it in the offset.