Please confirm or otherwise guide me about the distinction between a principal and interest versus an interest only home loan, in the important context of 100% offset.
OK, so you are not my financial advisor and your response does not purport to be financial advice (this is the boilerplate in Australia for people who aren’t allowed to give financial advice)
If I want to take out a $300 000 mortgage, which will be 100% offset by any cash I choose to leave in the account, then I can choose principal and interest, or interest only. Using this useful calculator
, if I go P&I, 25 years, then monthly payments are $1910, and the total repayments are $575k, of which interest is $275k.
If I choose IO, (but only ten years at a go since that is all they will offer you), the monthly repayment is $1410 and you’ve paid $176k in interest at ten years, and you’re of course left with the principal to pay off at ten years. But I will have saved the $500 pcm (and growing) difference for those ten years, so will have about $75 000 in the account offsetting the loan (this is slowly compounding , the more I save the less I pay), so would owe maybe $225k (I wish I had a better calculator that would work this out). I take out another IO loan at this time, monthly repayments start at $1100 pcm, saving $800 a month (compared to P&I), this difference grows to more than $1200 a month by year 20, I’d owe about $100 000 when that loan ended, and need to pay maybe another $125k in the next five years to discharge the loan fully.
So, considering flexibility and total payments, IO seems to be a better deal in the long run?