What is an offset mortgage?
An offset mortgage uses the money in your bank accounts to reduce the interest payments on your mortgage. If you have an offset mortgage, you’re not charged interest on the full amount of your mortgage. Instead, you’re charged interest on the sum of your mortgage, minus the total of any money you have in your designated offset accounts.
For example, if your mortgage balance is currently $550,000, you’d normally be charged interest on the full amount. However, with an offset mortgage, if you have $30,000 in one linked offset account and $5000 in another, these are subtracted from your mortgage total before interest is charged. In our example, you’d only be charged interest on $515,000.
It’s important to note that balances in any offset accounts do not pay off the principal loan, just reduce the interest payable on it, and you’re still required to make regular mortgage repayments.
Why get an offset mortgage?
Interest rates on savings accounts tend to be lower than interest rates on mortgages. Plus you have to pay tax on any interest you earn on savings accounts.
Therefore, if you’ve a sum of cash sitting in a savings account with your home loan lender, you can make the money work harder for you by offsetting it against your mortgage and reducing your interest payments.
Not only will your money be “earning” a rate of interest that is comparable with the interest rate on your mortgage, you’ll also not be sending any money to Inland Revenue, increasing the overall effective interest rate you earn on your money.
What are the downsides?
Offset mortgages come with floating interest rates, which are usually higher than those for fixed-term mortgages. Floating rates also fluctuate with the market. So, if you want certainty around your repayments, this may not be a good option.
Additionally, offset mortgages don’t allow you to redraw money from your loan, like a revolving credit account.
What is a revolving credit account?
A revolving credit mortgage is like an account with a large overdraft facility, with interest calculated daily.
You’re still required to make regular repayments to reduce the principal of your home loan, but any other money you put in (such as your savings and salary) also reduces the loan balance, and you can withdraw funds up to your credit limit at any time.
Why get a revolving credit account?
The biggest benefit of a revolving credit account is the ability to put all your money towards reducing the size of your mortgage, while still retaining full access to it.
If you have a lot of savings, or a high salary, this can help you pay off your mortgage faster than simply making your regular repayments.
When paired with a credit card used for all daily purchases, a revolving credit account can allow you to stash your household’s salaries, or salary, for the card’s interest-free period, thus offsetting your monthly spend against your mortgage.
Although, for this strategy to work, you do have to show financial restraint, keep within budget and be able to pay off your credit card bill in full each month.
A revolving credit account can also be a good option for those with irregular incomes, such as the self-employed.
When your income is high you can pile all your money into the account, reducing the size of your mortgage, and your interest costs, with the security of knowing that you can access your funds, up to your credit limit, during dry periods.
What are the downsides?
Revolving credit facilities usually come with monthly account fees – for example ANZ charges $12.50/m – plus, like offset accounts, revolving credit facilities use floating rates, which tend to be higher than fixed rates.
Revolving credit accounts can also be harder to manage: your mortgage account is also your savings accounts, and your everyday account. So you need to be on top of your spending to ensure you’re keeping within budget.
Offset mortgage vs. revolving credit account: which is better?
Offset mortgages and revolving credit accounts are similar, using your savings to reduce your interest payments. However offset mortgages do have some definite benefits.
The fact you don’t have to pool all your money into one account allows you to keep your finances separate, which can be easier to manage.
Plus most offset mortgages allow you to link multiple accounts, sometimes even other family members’ accounts, which could be mutually beneficial.
Just keep in mind that offset accounts do not accrue interest, and they’re not offered by all lenders.
You don’t need to put all your eggs in one basket
Unless you’ve large sums sitting around in various bank accounts that can make sizable reductions to your mortgage interest repayments, the floating rates and fees associated with offset and revolving credit mortgages can end up costing more than any possible savings if used for the entire sum of your mortgage.
However, you can always split your mortgage into different loan types and get the best of both worlds: a lower fixed-term rate for most of your mortgage, and the flexibility of an offset account or revolving credit mortgage for a smaller sum that matches your cashflow or savings.
It’s about finding what works best for you.
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About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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