Changes to ME Bank Offset Accounts

cooni on 26/06/2019 - 11:16
Last edited 26/06/2019 - 15:31

Since last month, I've been informed that ME Bank are changing the way they offset loans.

Previously, the offset interest would be sitting in my loan account as a credit after the repayment was taken. I'd transfer this money to my offset account and over the years I've grown a large cash pile.
Obviously it's handy having a lot of cash because it gives you a lot of financial freedom.
In addition to that, in offsetting my PPOR I keep the loan as large as possible for as long as possible for the future's sake when I (hopefully) convert it into an investment and want the tax benefits of interest on the larger loan.

I've only had experience with Bankwest (my first lender) and ME Bank, which both did what I described above, but as of this month ME Bank is using the offset interest to pay off the principal of the loan directly. I am not allowed to redraw the amount of principal that I am "ahead" so the money is locked up in the property instead of being directly available to me.

ME Bank say they did this to bring them "in line with the majority of the industry".
Is this actually the case? Had I been enjoying the freedom of offset being available as cash with the lenders I'd been with?
If you have an offset account, I would appreciate if you could post which lender and if offset interest is available to you as cash.

Thanks all.

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Comments

  • Seraphin7 on 26/06/2019 - 14:38

    For the sake of illustration (numbers are illustrative only), this is what occurs …

    1. You take out a loan, such that the P&I repayments are $1,000 a month.
    2. The first repayment is $900 interest, $100 principal.
    3. You plonk half the value of the loan into your offset the day the loan originates.
    4. You will still be making $1,000 a month repayments.
    5. That first repayment will be $450 interest, $550 principal.
    6. You now have equity in the loan of $450 (i.e. you have paid off $450 of principal in advance of the schedule).
    7. This $450 is available as a "redraw" on the loan (assuming your loan has a redraw facility attached to it).
    8. As this process continues, your loan equity/amount available for redraw increases every month.

    Long story short, you still have the cash available to you (assuming you have the redraw facility), it's just that the cash is sitting in the loan, not in the offset.

    • cooni on 26/06/2019 - 15:30

      Yeah that’s the thing, they said I can’t redraw.

      Only if I make repayments above the minimum repayments can I redraw that amount, but the additional principal repayments resulting from offset aren’t redraw-able. Are other banks like this too?

      • Seraphin7 on 26/06/2019 - 16:00

        The two loans I've had (Newcastle Permanent and ANZ) have both allowed redraw in the way I've described.

        • bmerigan on 28/06/2019 - 08:13

          Which is different to the question asked

        • Sheeplovebeer on 02/07/2019 - 20:42

          Doesn't work this way with other banks. You normally don't accumulate redraw.

  • stratbargain on 26/06/2019 - 15:39

    Is it a Principal and Interest loan or an Interest only loan (with I assume higher interest rates)?

    Sounds like you're trying to use a P&I account as an IO account at a lower interest rate and they've closed the loophole…

    • cooni on 26/06/2019 - 17:26

      It’s just a P&I loan with minimum repayments coming from my offset account.

      Is paying the minimum and “redrawing” the saved interest a loophole? I thought this was basically the whole point of an offset account.

      • stratbargain on 26/06/2019 - 18:08

        Maybe I'm confused, but are you redrawing the Principal? In that instant it is effectively an IO account, which probably wasn't a huge issue 3-4 years ago with P&I and IO accounts had similar/same interest rates. But these days all IO accounts seem to be at least 0.5% - 1.0% higher IR.

        Or are you saying they take the full Interest payment each month rather than taking into account the offset amount and you're just moving the different back? If so that does seem odd. Every offset I've had they just take the interest that applies after taking the offset into account.

        • cooni on 27/06/2019 - 08:11

          The second thing you said.

          They take the principal and full interest payment, and previously I could move the offset interest amount back.
          Now I can’t, and the offset interest amount has been used to pay off principal and I can’t get it back (until the loan is discharged I guess).

  • pikarlychu on 28/06/2019 - 06:18

    For an ANZ perspective: Offset accounts work in the sense that say you have a $200,000 loan balance and you have an offset account linked to that loan with a balance of $100,000. You will only pay interest on $100,000 of your loan balance as the other half has been offset.
    Redraw is wherein you pay your loan in advance, or generally whenever you pay above your minimum repayment.

    • cooni on 28/06/2019 - 07:02
      -2

      Thanks. So if you have a 200k loan and 100k in offset they only take half the interest in the first place right? So essentially less than the minimum monthly repayment is leaving your account.

      • cooni on 29/06/2019 - 09:07

        Why the negs? Did I misunderstand?

  • workhappens on 28/06/2019 - 07:50

    That's a little bit confusing and I haven't come across lenders who credit it in after, instead they just charge less interest in the first place.

    On another note, I have not converted a residential into an investment property before but is it going to be an accounting nightmare if you keep on redrawing from the primary loan account?

    • cooni on 28/06/2019 - 08:12

      Yeah, each month I’d have to log in and transfer the credit amount from the loan account back to offset.

      I don’t think it would matter accounting wise as the loan balance would only go down according to the calculated principal repayment and the positive available balance taken back down to zero after transferring back the offset interest.

      • workhappens on 28/06/2019 - 08:58

        It will matter if you continue to redraw after its converted, I think. But probably at that point your plan is stop this and move the money elsewhere.

        Just be aware if you redraw after its been converted to a IP then you may have to sit there justifying each transaction. But it doesn't sound too complicated in your case since everything just goes to offset.

  • GuyfromMelbourne on 28/06/2019 - 09:27

    Can't understand what the situation is. Please clarify by giving an example. Also mention the loan type details. Is it fixed/variable, int only/ principal and int. Are we talking about offset or redraw facility? Is the money in the loan account or seperate offset account. Happy to help if the details can be clarified.

    • cooni on 28/06/2019 - 09:41

      Variable, principal and interest, offset account.

      Example:

      200k loan.
      Minimum repayment is $2000 (for the sake of example, this month made up of $1000 principal repayment, $1000 interest), repayment direct debited from offset account.
      If I have 100k in the offset account, judging from responses here and my prior experience, one of 2 things are mean to to happen:

      1. $1500 gets taken from the offset account. Half the interest is never charged and now my loan balance is 199k, available balance $0.

      2. $2000 gets taken from the offset account. The offset interest remains as a credit in the account. Loan balance is 199k, available balance $500 which I can now transfer back to the offset account.

      But ME Bank has pushed a change where this happens:

      . $2000 gets taken from the offset account. My loan balance is now $198500, $0 available balance.

      • GuyfromMelbourne on 29/06/2019 - 00:22

        The way you are explaining ME is doing now is exactly how Principal & Interest loans work in big four too. If you want to pay less just because there us heaps in offset. You have to change the loan type to Interest only loan.

  • Oceanbreeze on 28/06/2019 - 09:49

    I understand 100% what you are saying and I can confirm that they it is the same as home loans with nab (the new policy).
    That being that the min repayment on your loan contract which includes the interest portion will always go towards paying down the limit on the loan regardless of your offset balance. The extreme case example is if you had 100% matching offset account and loan account balances then 100% of your repayment will go towards paying down the limit and you will be paying it off as quickly as possible.

    My guess is that if it this way at nab then it is probably the same with other big 4 banks.

    • cooni on 28/06/2019 - 11:56

      Thanks for the confirmation that at least one other lender has gone this route. You call it NAB’s new policy - do you know since when?

      I wonder if this will be an industry wide shift. It’s only been 6 months since refinancing 2 loans and settling a third with ME and they pull this on me. Tough decisions ahead because I got “majority pricing” for my investment loans - owner occupied rates for them.

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