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Note: When you read the word “Principal”, it refers to the loan amount owing to the lender after interest, which can be on either your home or your investment loan account; I may also refer to your “Loan” as “Mortgage”, all loan structures are calculated at 80% LVR.

Now let me explain why interest only?

The benefit to having your loan set up as interest only versus principal and interest is this:

Here you are, doing the correct thing and saving as much as you can by depositing all the money you receive in the 100 percent offset account, so that the money in the 100 percent offset account is deducted from your loan balance before interest is calculated (as explained on page 6 of The Money Elements Report https://moneyelements.com.au/money-elements-report-calculator/ ).

This works exactly the same way for either interest only or principal and interest loans... the huge difference between the two, is that, the interest only option leaves you with more money in the offset account, because all that the bank is taking is an interest payment.

For example, let’s say that by the end of the month you have saved $2000.00 after all your monthly expenses except your mortgage repayment which the interest portion comes to $1000.00 and the principal portion comes to $200, well with an interest only loan you only have to pay the $ 1000.00, which leaves you the full amount of $1000.00 in your 100 percent offset account for your disposal...compared to a principal and interest payment of $ 1,200 which would leave you with $800 in your 100 percent offset account.

I’ll give you an example of both scenarios.
Principal and Interest Payment Method (numbers and repayment amounts are made up for the purpose of this example).

Scenario before Payment is made:
If your home or investment loan balance is $240,000 on that day.
$240,000
And your savings account (100 percent offset account) balance is $40,000 on that day. Less $40,000

Then you only pay interest (interest will be $1,000) on $200,000 for that day, (plus a principal component which will be $200). Equals $200,000

Once the Principal & Interest Payment of $1,200 is withdrawn from your 100 percent offset account, you will have new balance of $38,800 ($40,000 less $1,200) for that day.

Your home or investment loan balance will be paid down to $239,800 ($240,000 less $200) on that day.

Remember that a $1,000 has gone towards the interest payment and the $200 towards the Principal, or in other words, towards your home or investment loan.

Now you will have the following account balances, and the interest will be calculated as follows: (numbers and repayment amounts are made up for the purpose of this example)

Your home or investment loan balance will be $239,800 ($240,000 Less $200) on that day $239,800

Once the Principal & Interest Payment of $1,200.00 is withdrawn from your 100 percent offset account, you new balance will be $38,800 ($40,000 Less $1,200) for that day. Less $38,800
Then you only pay interest on $201,000 for that day, (plus a principal component). Equals $201,000

Now using the same example however this time, it is Interest only Payment Method (numbers and repayment amounts are made up for the purpose of this example).
Scenario before Payment is made:

If your home or investment loan balance is $240,000 on that day.
$240,000
And your savings account (100 percent offset account) balance is $40,000 on that day.
Less $40,000
Then you only pay interest (interest will be $1,000) on $200,000 for that day.
Equals $200,000

Once Interest Only Payment of $1,000 is withdrawn from your 100 percent offset account, you will have a new balance of $39,000 ($40,000 less $1,000) for that day.
Your home or investment loan balance will still remain at $240,000, as no money has gone towards the principal, or in other words, towards your home or investment loan for that day.

(Numbers and repayment amounts on the following page are made up for the purpose of this example).

Now you will have the following account balances, and interest will be calculated as follows:

Your home or investment loan balance will be $240,000 on that day $240,000

And your savings account (100 percent offset account) balance is $39,000 ($40,000 Less $1,000) on that day. Less $39,000
Then you only pay interest on $201,000 for that day.
Equals $201,000

As you can see with the examples above, either will reduce the amount of interest you pay, put only one gives you full access straight away to the extra cash, in this case $200, which is deposited in 100 percent offset account.

With principal and interest, you will be left with a lot less money at your disposal, because your mortgage repayment would have included that principal component ... that principal component does go towards reducing the loan amount, which means you are reducing the amount of interest you pay, (as the example above has show), but it also means that you are paying down your loan (your home or investment loan balance), which could not be as beneficial to you, (as I explain in The money Elements report on page 9 https://moneyelements.com.au/money-elements-report-calculator/ ).

Principal and interest is paying down your loan and interest only is not...but the time it takes to pay your mortgage, remains the same, I will explain how.

Let’s say that over a 25 year loan contact, you have, deposited money into the 100 percent offset account to an equal amount of that of your mortgage loan amount, (not taking into consideration that you would of gone back to the lender or refinanced with a different lender for additional interest only periods), at this point you would not need to make any more mortgage repayments until the balance in the 100 percent offset account has gone below the amount you owe in the loan account or, the interest only period has elapsed (interest only period is explained further down in this section).

Now, over the same period of time with a principal and interest loan, you would have still deposited that same amount into the 100 percent offset account, but that money would of gone towards the loan account and paid down your loan to a zero balance... which also means, you would not need to make any more mortgage repayment... so you see, you won’t be making any more mortgage repayments in either circumstances, but with the loan account being interest only, you would still have all the money sitting in the 100 percent offset account for your disposal...compared to the a zero balance in the 100 percent offset account, with a principal and interest loan.

Note: The other thing to be aware of with a principal and interest payments, is that let’s say you did not have a 100 percent offset account, and instead you opted for a redraw on your loan, and you have been depositing all your money straight into the loan account... you now have decide to withdraw the extra money you put into it... what happens in this case is that you will only be able to draw down a pro rata amount to what you deposited because of the 25 year loan contact... what this means is that on a 25 year $240,000 loan which, let’s say you have deposited $100,000 over 5 years straight in to the loan account, you would not be able to draw the whole $100,000 dollars, there will be 5 years of principal that needs to come off your loan amount, which will leave you with a balance of 20 years to pay down the rest of your loan.

So, with interest only, the biggest difference is that you have more money at your disposal for opportunities that may come your way such as investment opportunity...or the other big thing, such as hard times, losing your job... living expenses being higher and putting pressure on your cash flow...by having the money available to you in the 100 percent offset account, this gives you GREATER control, without sacrificing or extending the time it takes to pay off your loan.
So, if you have the set up as “The Money Elements Report” (https://moneyelements.com.au/money-elements-report-calculator/) has shown you, you are not at the lenders mercy...you are in full control of your financial future.

If you are not set up as shown in The money Elements Report, (https://moneyelements.com.au/money-elements-report-calculator/) then please relook at you loan structure, I do want to stress that I believe IT A GREAT TIME TO CASH UP AND PLAY LIFE SAFE

For those that own successful business, YOU REALY NEED TO THINK ABOUT CASHING UP AND PROTECTING YOUR ASSETTS. I CAN HELP YOU.