How do interest only periods work, if I've been putting money into an offset account, when the interest only period is over do they just charge you principle and interest on the difference between what's in your offset account and the loan amount?

It's for investment properties, in case it's different to home loan

Hi Zoe,

Are you referring to interest only loans? As home loans (unfortunately!) don't have any interest free period. It would be nice though!!

If you were referring to interest only loans, then once the interest only period is expired then it automatically switches to principal and interest.

If you had money in your offset account, during the interest only period the repayment will be based on the loan balance. (ie $300,000 loan, $100,000 in offset, interest charged on $200,000)

Once the interest only period has expired, your repayments will automatically increase to Principal and Interest of the original loan amount.

I hope this clarifies and answers your question.
Nicole :)

Hello Zoe.
It is taken that this question is about Interest Only periods of your investment loan.
At the end of the interest only period (typically between 5 - 15 years depending on the lender) your monthly repayments of principal and interest will be calculated based on the loan balance and the remaining loan term.
The money in the offset will not impact on that calculation.
Where you do benefit from having money in the offset is the actual monthly interest amount will be reduced meaning more of each month's payment goes to reducing the principal of the loan.
Hope this is a clear explanation for you.

Hi Zoe,

Firstly you should contact your mortgage broker or bank to discuss your new repayments as each lender is different.

For example some lenders will use the original 30 year term for P & I calculations while others will base it on the remaining term.
Money in the offset may affect the loan repayments with some lenders also.

Without knowing the lender the you have your mortgage with its a hit like trying to ask the speed limit on a road that hasn't even been built yet.

Interest free periods only apply to credit cards. You're talking about a mortgage loan. I don't known of any interest free mortgages? If yes, I want one! Answer is yes interest is on the net balance of the loan as you said. What you want to know is How you pay off sooner by doing this. Answer is to maintain the repayment, it's just that less of that repayment amount is interest. Think running up a hill wearing roller skates, that's a mortgage. With offset, the hill isn't as steep.

Hi Zoe
Yes. They will charge you P&I on the balance owing on your mortgage. So as in Nicole's example if you have $500k mortgage and $100k in your Offset Account then interest is calculated on $400k regardless of whether you pay interest only or Principle & Interest. The only difference is your repayment will increase because you will be paying principle as well as interest. It is interesting to note though, that you be able to re negotiate another interest only term. Who is your lender? Did you use a broker? If so get hold of them. If not then email or call me and I'll help you. Kind regards Andrew 0413 105 822 or andrew@myfinancepeople.com.au

No, you will be paying principal and interest on the loan balance. The interest earned on your savings in your offset account (which will be same interest rate as your home loan) will be applied to your loan balance at the end of the month.