Offset Mortgages – Maximising Savings & Flexibility

Pay More Principal and Less Interest With Offset Mortgages

This article talks about how offset mortgages work in New Zealand’s banking system. It also considers the benefits they offer and the potential drawbacks associated with these financial products.

In the field of personal finance, new ways to handle debt and save money have become more popular. “Offset mortgages” is one of these strategies that has been getting a lot of attention.

This allows you to lower the amount of interest you pay on your home loan, while still having access to your savings.

How Offset Mortgages Work

People make mortgage payments to cover both the principal and interest. However, offset mortgages work differently. The idea is to apply your balance of your transaction accounts to reduce the outstanding mortgage balance. Interest is lower since the home loan balance is lower.

Hypothetical illustration: Assuming

• The principal amount (amount of loan) = $500,000.
• Interest rate is 6%
• Interest calculation: $500,000 loan balance x 6%, which is $30,000 pa.

If you have a savings account with a $20,000 balance, that can then be offset against the loan balance – this will lead to an interest payment of $28,800 ($480,000 balance x 6%). Consequently, there is an interest saving of $1,200.

Offset Mortgage Benefits

• Interest Savings: The main benefit of offset mortgages, is the chance to save a lot of money on interest. As the amount in the linked account goes up, the interest part of the mortgage payment goes down. This lets borrowers pay off their mortgages faster.

• Flexibility: Offset debts give you some freedom with your money. You can access money in your linked account at any time, which makes it a great choice for those who want to keep their cash flow as is, but lower their interest costs.

• Tax efficiency: In New Zealand, you have to pay income tax on the interest you earn on your savings. In other words, if your savings are paying off your mortgage instead of making interest, you won’t have to pay taxes on them. Most of the time, you’ll pay tax on savings income at your PAYE rate – Please refer to your Accountant for personal tax advice.

• Shorter Loan Term: The loan term is reduced, because you pay less interest and therefore, pay more off on principal.

• Interest Rate Parity: In some cases you can offset your mortgage with up to 50 accounts, and family members can also take part.

Drawbacks of Offset Mortgages

• Higher interest rates: Offset mortgages may have interest rates, that are a little bit higher than regular mortgages. You should carefully think about whether the interest savings you might get are worth the higher interest rate.

• Savings growth is limited: Offsetting can save you money on interest, but the linked account may earn less interest (or no interest) than other ways to save.

• Account Fees: Some banks may charge fees to keep up the linked offset account, which could make the mortgage less cost-effective overall.

• Complexity: The way offset mortgages work can be complicated, which could be confusing. To get the most out of the benefits of an offset mortgage, you need to have a clear idea moving forward and do the additional financial planning.

• Criteria for Eligibility: Not everybody can get offset mortgages. Lenders usually want a certain amount of equity and a good history.

Full and Partial Offsets

Some banks let borrowers choose between a partial or full offset, giving them a bit of flexibility to meet their own financial needs. 

This amount of personalisation makes it possible to meet different financial goals and needs.

For example, someone who needs more cash might choose partial offset, while someone who wants to pay the least amount of interest, might choose full offset.

New Zealand Banks That Offer Offset Mortgages

Only a few banks in New Zealand give offset mortgage products, and each one has its own features and benefits. One of the most important benefits of these options, is the ability to link different accounts to the mortgage. This lets borrowers pay off more of their mortgage, with the balance from other accounts.

As mentioned previously, offset mortgages do have some advantages, but they might not be right for everyone.  You would need to carefully assess your financial situation, including your saving habits and spending patterns, to determine if an offset mortgage aligns with your goals. 

Therefore, this product can be highly beneficial to borrowers who are financially well disciplined and want to get the most out of their mortgage payments, while still having access to their savings.

Borrowers should do a lot of research, compare what different banks have to offer, think about their own financial goals and wants, and maybe even talk to a financial professional before deciding if an offset mortgage is the right choice for them.