An offset mortgage account allows you to select a number of accounts where you hold a positive balance to be offset against your mortgage balance. Offset mortgages have a floating or variable interest rate, which is usually higher than fixed interest rates. Typical accounts that you would use to offset your mortgage balance would be savings accounts or everyday accounts such as accounts where you move money to pay your bills with.

You only pay interest on the balance of your mortgage account minus the balance of your offset accounts. However you do not earn interest on the accounts where you have a positive balance and have designated to be offset accounts. You will have a minimum repayment amount which you'll pay on your payment date. Typically the banks providing this account will allow you to make extra payments on your mortgage without paying a penalty.

If you use an offset mortgage account properly it will decrease your interest paid over the life of your mortgage. The result being that you end up paying your mortgage off faster and pay back less interest over the course of your loan.

An Offset Mortgage Example

Referring to the image above, imagine you have positive balances across some accounts that totals $15,000. If you have an offset mortgage, when the bank calculates the interest you owe it will subtract $15,000 from the balance of your mortgage $250,000 so you end up being charged interest on $235,000 instead of $250,000.

How Much Does an Offset Mortgage Save Me?

Calculating potential savings is complex as it involves:

A day by day comparison of what you would pay under a fixed rate versus payments under floating rates applied against your mortgage balance offset by accounts whose balances vary day by day.

However that's exactly what your financial adviser is there to help you with. A good financial adviser should be able to work through this with you! Here's what you'll work through and understand to see if this type of account makes sense for you.

• There is a trade off in that you are not earning interest on your savings but instead are reducing it on your mortgage payments.
• In that respect there is a tax savings as you are taxed on savings account interest.
• The interest rates in New Zealand for floating rates are usually higher than fixed rates.
• So you need to have enough positive balance to offset that higher interest you pay on a floating rate.

It's complex but we have tools to help analyse this type of decision to see if it's correct for you!



Offset Mortgage Pros and Cons