Lesson plan
Offset loan
An offset loan is a type of lending arrangement, usually for a mortgage, in which a borrower also maintains a savings account with the lender. Instead of receiving interest on the savings account, the interest payment due on the loan is calculated only on the net balance of the loan minus the savings account. The regular payment is calculated on the full amount of the loan, however, and so making regular payments pays off the loan faster than a standard loan with the same interest rate, amount, and periodic payment. Lenders usually charge a higher interest rate on offset loans than other types of loans. That makes offset loans a good idea only for borrowers who normally have large cash balances. If the cash to be used to offset is permanently available to pay down the mortgage and is not needed for emergency spending, borrowers are normally better off prepaying a more typical mortgage. A customer with a $150,000 home loan over 30 years would pay approximately $167,190 in interest. A customer with an offset account linked to the home loan for the entire loan term with a constant balance of $10,000 in it would pay the loan off in 26 years and 4 months, with only approximately $127,553 in interest. That is a saving of three years and eight months and approximately $38,636.95 in interest.…
Article summary
An offset loan is a type of lending arrangement, usually for a mortgage, in which a borrower also maintains a savings account with the lender. Instead of receiving interest on the savings account, the interest payment due on the loan is calculated only on the net balance of the loan minus the savings account. The regular payment is calculated on the full amount of the loan, however, and so making regular payments pays off the loan faster than a standard loan with the same interest rate, amount, and periodic payment. Lenders usually charge a higher interest rate on offset loans than other types of loans. That makes offset loans a good idea only for borrowers who normally have large cash balances. If the cash to be used to offset is permanently available to pay down the mortgage and is not needed for emergency spending, borrowers are normally better off prepaying a more typical mortgage. A customer with a $150,000 home loan over 30 years would pay approximately $167,190 in interest. A customer with an offset account linked to the home loan for the entire loan term with a constant balance of $10,000 in it would pay the loan off in 26 years and 4 months, with only approximately $127,553 in interest. That is a saving of three years and eight months and approximately $38,636.95 in interest.…
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Discussion questions
- Summarise the article in your own words. Which single claim would you verify first, and why?
- Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
- If two sources disagreed about one of these facts, what would you need in order to trust one over the other?
Bibliography
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