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 $5,000 in savings, you’ll only pay interest on $195,000 of your mortgage. At an offset-mortgage rate of 5.90% on a 30-year mortgage, this could save you over $8,000 in interest and reduce your loan term by about 18 months.

Kiwibank’s “Offset Mortgage”, BNZ’s “Total Money Home Loan” and Westpac’s “Choices Offset Mortgage” allow you and your family to link several accounts (up to 50 at BNZ, 10 at Westpac and 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 and Westpac, and $250 for Kiwibank). BNZ and Westpac charge a $10 monthly maintenance fee; Kiwibank does not charge a fee for this.

Good points

• Offset mortgages are flexible — so your savings are available if you need them.
• 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
• 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

• 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. You need to be comfortable with the uncertainty of a floating rate.

Offset vs revolving credit

Offset mortgages are similar to revolving credit (also known as line-of-credit) mortgages. Revolving credit is 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 or who 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.

Revolving credit mortgages may work better for people with irregular income or spending as there are no fixed repayments. Lump–sum repayments can be made whenever you like, for as much as you like.