An offset mortgage is a type of home loan that allows you to use your savings to offset the balance of your mortgage. The interest you pay is based on the loan balance minus any savings in the offset account. The key benefits of this type of loan are potentially lower interest payments and a shorter mortgage term.
Offset mortgage in action
Here’s an example of how offset accounts work. Let’s say you have a $600,000 mortgage with an offset account. If you have $100,000 in savings in your offset account, you only pay interest on the remaining $500,000 of your mortgage.
This means you save money on interest and can pay off your mortgage faster.
Pay off your mortgage faster and save money overall: Generally speaking, the interest rate on a mortgage is higher than the interest rate you earn on a savings account. By forgoing interest income on your savings and offsetting your mortgage, you can save more overall and pay off your mortgage faster.
Lower your monthly mortgage cost: By keeping your money in the offset account, the interest charged on your home loan is lowered. Although the principal repayment will be the same, the interest component will be reduced.
Full access to your savings: Some traditional savings accounts penalise you for withdrawing money. With an offset account, you have full access to your savings. With savings readily available, you’ll have peace of mind and the financial flexibility to weather tough times, such as a job loss.
Tax benefits: When your savings are used to reduce your interest expense on your mortgage, you won’t be taxed on the interest earned on your savings. This can be a significant tax benefit compared to typical savings accounts, which are taxed at your PAYE rate. The benefits here can be twofold; you’re effectively earning a higher interest rate on your savings because home loan rates are higher than savings account interest rates, and you don’t need to pay income tax on interest earned (because you’re not technically earning interest, you are reducing the amount of interest you pay).
There are potential disadvantages to this type of loan too. Let’s take a look:
Floating interest rate: Your monthly mortgage repayment could fluctuate if the Reserve Bank of New Zealand adjusts interest rates. Changes in your home loan interest rate could make managing your budget from month to month more challenging.
Foregoing interest income: With an offset mortgage, you won’t earn interest on your savings. This means you’re forgoing interest income that you could have potentially earned on a regular savings account.
Monthly fees: Your lender may have ongoing fees for having an offset mortgage which can add up over the lifetime of the loan.
Savings accounts must be with the same bank: To make the most of an offsetting arrangement, it is best to have your savings accounts with the same bank as your offset mortgage. This can be inconvenient to move your money around.
How to decide if an offset mortgage is right for you
Step 1: Take stock of your finances
Would an offset mortgage make sense for your current financial situation? Look at your debts, income, and expenses to consider if you have enough savings to offset your mortgage balance.
In general, an offset mortgage is best suited to borrowers with significant savings or regular cash flow. If you have little money in savings, you likely won’t be able to take advantage of the potential interest savings, and your interest rate may be higher compared to other mortgage options.
Step 2: Compare offset mortgages online
Carefully compare different offset mortgages to find the one that best suits your needs and has you better off financially in the long run. An offset account compared with a regular mortgage is also something to evaluate.
Key factors to consider when sizing up loan options from different lenders include:
Interest rates: How do the offset mortgage loan rates stack up against other types of home loan interest rates? Be diligent in comparing interest rates to ensure you’re getting the best rate for your situation.
Offset account balance limit: You may be able to find an offset account with no maximum balance limit. This means you could offset larger amounts against your home loan balance and save more in interest.
Extra repayments: Can you make extra repayments? If so, what are the fees or limits on how much you can repay?
Direct debit: Some lenders offer direct debit for your offset account, which can help you stay on track with your savings goals.
Tax implications: Generally speaking, an offset mortgage can have potential benefits for your tax situation. Rather than earning interest in a savings account and having to pay income tax on the amount, your savings reduce the amount of interest you would have to pay on your home loan. So you can reduce your interest expense and income tax.
Full balance: Compare the terms and conditions for the balance requirement. With some lenders, you’re required to keep the full balance of your offset account linked to your home loan while others allow you to keep just a portion of the balance.
Step 3: Crunch the numbers
Do the math and see how much you could potentially save with an offset mortgage compared to a regular mortgage home loan interest rate.
Offset mortgage FAQs
Can I get an offset mortgage if I have a deposit of less than 20%?
It’s possible to get an offset mortgage with a deposit of less than 20%, but it depends on the lender’s eligibility criteria.
Can I get an offset mortgage for an investment property?
Yes, it is possible to get an offset mortgage for an investment property, but not all lenders offer this type of mortgage. You may find it more difficult to get an offset mortgage for investment property than owner-occupied offset mortgages. The interest expense on investment loans is generally tax deductible, which means there is less of a need to reduce the interest paid on an investment property mortgage.
Can I get an offset remortgage?
Yes, some lenders do offer offset remortgage products, which is essentially refinancing your existing mortgage to an offset mortgage. However, the eligibility criteria may vary from lender to lender.
Compare offset account mortgages
A great opportunity to use account(s) with a positive balance to offset the total amount you owe on your mortgage and save on interest payments