What is an offset mortgage?
An offset mortgage account allows you to designate a set number of accounts (cash savings accounts and everyday accounts) where you hold a positive balance to be offset against your mortgage balance. Offset mortgages have a floating or variable interest rate, which could be higher or lower than fixed interest rates.
You only pay interest on the balance of your mortgage account minus the balance of your offset accounts. This is opposed to paying interest on your home loan and simultaneously earning interest on your savings. Essentially, having an offset mortgage means you can pay less interest.
Offset Mortgage Example
If you have a mortgage of $250,000 and savings of $15,000 then you only pay interest on $235,000. The amount in your offset account reduces your loan balance for the purposes of calculating interest.
The flip side of this is that your designated offset accounts with a positive balance do not earn interest as it would in a term deposit or savings account. This is in no way a negative, depending on your cash flow needs and income situation. For example, the interest earned on money in a savings account is subject to income tax, whereas with an offset mortgage, you are saving interest instead of earning it, so there is no income tax payable!
How does it work?
If you have money left over at the end of the month, you might decide to make an extra mortgage payment (decreasing your principal and saving interest) or put the money into your savings balance (increasing your offset and hence decreasing the amount you pay interest on). The difference is that if you make an extra mortgage payment, you can’t get that money back at a later date, i.e. redraw it.
Offset loans have the added advantage of not having to pay any tax on your interest income from savings (as this account is not earning interest, it’s reducing your interest expense).
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What are family offset loans?
Some home loan providers, such as Kiwibank, even let you offset your mortgage against the savings account of your parents, partner or children. This enables your relatives to help you with your mortgage without having to directly loan you any money. Note that in doing so, they sacrifice any interest earned on their savings.
Can I use my Kiwisaver to offset my mortgage?
No, unfortunately, you can’t offset your mortgage against your Kiwisaver account.
View offset mortgages here.
What is a revolving credit mortgage?
A revolving credit home loan is one big account for all of your transactions. It acts as a large overdraft with a limit to the total amount you can borrow. Your income and savings go into the account, and your interest payment and expenses are taken out. Your income and savings effectively offset the mortgage by reducing the outstanding balance of the home loan. Any money you spend increases the balance of the home loan, and you are charged interest accordingly. You only pay interest on the balance of the home loan, and you can pay the home loan off at any time.
How does a Revolving Credit Mortgage work?
A revolving credit account is based on a floating interest rate and has no fixed loan term. The credit is ‘revolving’ because you can borrow and repay funds over and over. This means you are able to make lump sum repayments to reduce the balance of the home loan, or large withdrawals to increase the outstanding balance of the home loan up to your limit. The idea is that if you earn more than your total expenses and interest payments, then the home loan will naturally decrease over time. However, if you need the extra credit, then it is available to you.
This type of account is best for people with irregular incomes, like self-employed contractors or seasonal workers. Revolving credit suits good budgeters who are disciplined with their money. It can also be beneficial if you plan on making a series of home renovations over a period of time, as it enables you to draw credit as necessary without multiple fees and home loan applications.
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View revolving credit mortgages here.
FAQ’s
Can I use an offset account for an investment property?
You can use an offset mortgage for both personal and investment mortgages. However, there may be tax deductions for the interest portion of your monthly repayment so offsetting an investment may not be in your best financial interest. Be sure to speak to your tax adviser.
Are there any problems with an offset home loan?
When deciding if an offset mortgage is right for you, it’s important to weigh up the pros and cons according to your goals and situation. Generally speaking, offset mortgages provide people an option to save money while reducing the amount of interest paid on their home loan. When used effectively, an offset mortgage may help to reduce your mortgage by thousands.
Differences: Revolving Credit vs Offset Mortgage
- The key differences are that an offset account keeps your savings and everyday accounts separate to your mortgage. On the other hand, a revolving credit lumps all of your finances together in a single account.
- Further, a revolving credit allows you to redraw credit a number of times. An offset mortgage won’t let you redraw your credit, but you will have access to your savings account if required.
Offset Account / Revolving Credit Account Summary
- Both offset mortgages and revolving credit accounts are reasonably complex products compared to a standard mortgage. Each product has features that can make an enormous difference to the amount of money you a) pay off your mortgage and b) have available to spend.
- Understanding whether these products are a good fit for you is the key point when you are assessing whether to sign up for one. Your bank lender or mortgage broker should be able to help in the assessment of your personal finances and advice.
- These products are best suited to those who are disciplined with their spending. They might be difficult to get if you have a poor credit history and low equity.