Would I be better paying interest only with an offset account or principal and interest loan?
Firstly, understand the purpose of the loan - is it for investment or home purchase? Short term or long term? Can you afford higher payments? Interest-only loans work best for those who want the lowest minimum monthly repayment on a mortgage or do not wish to focus on paying the debt down immediately. Borrowers may require greater flexibility as to how and when they reduce the debt. While the loan term may be up to 30 years, typically the loans revert to P&I after, say, five years. They suit those who have an investment property or want the minimum obligatory payment to be as low as possible. Principal and interest loans work best for those who want the certainty of knowing the loan will be paid off on or before a predetermined date. Borrowers are often motivated by seeing the loan balance diminish on a monthly basis. They may want or require the forced discipline of regular principal payments. These loans are typically offered by lending institutions for between one and 30 years. Obviously the difference in term will determine the size of the contracted monthly payment and the amount of interest you pay. Fortnightly repayments are an effective way to pay back a debt quicker. It’s set at half the monthly loan payment obligation, but there are 26 fortnights in a year, so you make an extra monthly loan repayment a year. An offset account offsets the balance of the account against the outstanding loan balance. Mortgage interest is typically calculated on a daily balance, so the more you have in the offset account and the longer you retain it in the account, the greater the interest offset. Whether you pay more off the actual loan or leave more in an offset account, they have the same effect on the interest charged. Flexibility is the issue: will you be able to redraw funds in the future to renovate or to supplement income if you are off work for a period? From a tax perspective, are you better redrawing from an offset account or directly from the loan? Your mortgage broker will be able to explain it further to you.