An offset account is a savings account which is normally linked to your loan account and helps you reduce the amount interest you pay on your loan. Whilst you do not receive any interest on your offset account you do not pay any interest on your loan for the equivalent balance in your offset account, for example if you have $10,000 in your offset account and have a loan of $300,000 then you would only pay interest on a net loan balance of $290,000. An offset account provides you with the ability to withdraw or add further funds at any time and provides a tax effective outcome because you do not receive interest income which is normally subject to tax however receive an intangible benefit of paying a lower amount of interest on your loan.
A redraw facility allows you to make additional repayments on your loan however still gives you access to those extra repayments if you need them. By making extra repayments to your loan you can reduce the amount of interest you pay on your loan with the peace of mind that you can access these extra repayments if required. Normally most lenders have a minimum redraw amount and charge a small fee every time you use your redraw facility.
Monthly, fortnightly, or weekly mortgage repayments?
Most lenders provide the flexibility to make either monthly, fortnightly or weekly repayments which means you can align your loan repayments to how you get paid. Normally with most loans interest is accrued on a daily basis and charged monthly so by making loan repayments on a more frequent basis you could pay your loan out sooner and generate significant interest savings over the life of the loan.
Principal and Interest Repayments
Principal and interest repayments are calculated on the basis that your loan repayments will be sufficient to repay your loan over an agreed term at your current interest rate and at the end of this term your loan will be repaid in full. Principle and Interest repayments can go either up or down during the term of your loan reflective of any movement in your interest rate.
Interest Only Repayments
With an interest only loan, you are only required to repay your interest costs without any requirement to make any reductions to your principle. At the end of your agreed interest only period you normally have the following options;
- repay the loan principal in full
- convert the loan to a principle and interest reducing arrangement
- seek a further interest only term
Whilst a interest only loan only requires you to meet minimal interest only repayments this does not normally prevent you from making reductions to the principal at your discretion which will have a direct benefit in reducing your ongoing interest costs however if your loan is on a fixed interest rate an early repayment cost maybe applicable for this privilege. Normally as interest is accrued on a daily basis and charged monthly your repayments will vary month to month depending on how many days are in the charging period.
Interest only loans are commonly used by property investors who like to keep their loan repayments to a minimum with a view that their investment property asset will appreciate over time resulting in a capital gain. This capital gain is only realised when the investment property is sold at which time the loan principle is repaid in full.
Most lenders also offer the flexibility to pay interest only in advance either quarterly, half yearly or annually. Normally this type of feature is only available on fixed rate loans and is commonly used by investors to pre-pay future interest costs with the ability to claim a tax deduction in the the year it is expensed.
Some lenders offer the ability to switch between different loan types to provide you with the flexibility to manage your finances depending on your individual requirements for example the ability to switch from a variable to a fixed rate or from a Line of Credit loan to a principle and interest reducing loan may be available however normally a small fee is payable for this privilege.
Loan portability allows you to move between properties without having to repay your existing loan and take out a new loan. The ability to sell your existing house and purchase your new house under the same loan can allow you to upgrade properties to reflect your individual requirements however normally loan portability is not available should an increase to your existing loan be required at which time a new application would be applicable.