Piggy bank

A new way to cut your mortgage costs.

Offset mortgages are popular in the UK and Australia but they’re still relatively unknown here – Kiwibank and BNZ are the only banks to offer them. Are they worth considering as an alternative to revolving-credit mortgages?

How they work

An offset mortgage uses your savings to help cut down the interest you pay and the length of time your mortgage runs for. Your savings and your credit accounts are linked – and instead of earning interest, your savings are subtracted from your mortgage.

For example, if you have a mortgage of $200,000 and $5000 in savings, you’ll only pay interest on $195,000 of your mortgage. At one bank’s current offset-mortgage rate of 5.59 percent on a 30-year mortgage, this could save $559 in the first two years of your mortgage. This is more than the $5000 would earn in a savings account over this period.

Kiwibank’s “Offset Mortgage” and BNZ's “TotalMoney Home Loan” allow you and your family to link several accounts (up to 10 at BNZ, 8 at Kiwibank) so you can pool your savings to cut down your home-loan debt. On the downside, you may have to pay set-up fees plus a loan-establishment fee (up to $400 for BNZ, $250 for Kiwibank). And both banks charge a $10 monthly maintenance fee ($120 a year).

Good points

  • Offset mortgages are flexible – so your savings are available if you need them. You can also make lump-sum payments without penalty, to help pay off the mortgage.
  • You can offset transaction (“call” or “cheque”) accounts as well as savings accounts against your mortgage.
  • The more you save, the less interest you pay on your mortgage and the faster you pay it off. If your savings are equal to the balance of your mortgage, you’ll pay no interest at all.
  • You’ll be saving at a faster rate than if you had a conventional mortgage and a conventional savings account.
  • Interest is calculated daily and so every deposit into your savings and transaction accounts works to reduce your mortgage.

Not so good

  • To make an offset mortgage worthwhile, you need to be able to save or maintain savings – you’ll need to have roughly about $2200 a month in your savings and transaction accounts.
  • You must be disciplined. If you make deposits, your home-loan balance decreases; if you make withdrawals, it increases.
  • These products are only available as floating-rate mortgages. Rates are low at the moment, but this can change. You need to be comfortable with this uncertainty.

Offset vs revolving credit

Offset mortgages are similar to revolving-credit (also known as line-of-credit) mortgages. Revolving credit’s like a large overdraft secured against your house. The loan is linked to your cheque account. Any money deposited into your cheque account – such as your salary or income – reduces both your loan amount and the interest you pay. Like offset mortgages, they’re only available at a floating rate.

Offset mortgages can work well for people who want to help their children buy a house, have a large chunk of savings and are happy to forego the interest on it. A family group can also work together to pay off a mortgage through linked accounts.

In an offset mortgage, your savings and everyday accounts are kept separate rather than rolled into one. This separation makes it easier to keep track of your income, expenditure and savings.

Revolving-credit mortgages may work better for people with irregular income or spending. For example, self-employed people can keep provisional tax payments in their cheque account until they need to pay their tax. Revolving-credit accounts are all-in-one accounts, so you must have the discipline to track your money as it flows in and out of your account.

Our view

  • Offset or revolving credit mortgages can mean you repay your mortgage more rapidly than with a standard mortgage – as long as you’re financially disciplined.

 

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