Mortgage offset facilities, for those who are unfamiliar with the idea, are a feature of some homeloans that allow borrowers to utilise their savings to lower the amount of interest they pay on their loan.
In essence, the borrower’s savings are “offset” against the outstanding balance of their homeloan, lowering the amount of interest they pay throughout the loan’s duration. Imagine a seesaw where on one side, you have your mortgage owing to the bank, yet on the other side is a bucket of all your various savings account. If the side of seesaw with your savings is just barely hitting the ground, then you pay no interest on your mortgage account. Here’s where it pays to be heavy!
The potential to pay less interest on your home loan is a significant advantage of using a mortgage offset loan account. Even if you don’t have a lot of money saved, every dollar you save, will reduce the interest rate you pay on your loan. This can add up to considerable savings over the course of your loan, allowing you to pay off your mortgage sooner.
Another benefit of offsetting is the flexibility it offers. Borrowers can modify their monthly payment amount online, make lump sum repayments, and join accounts with family members to assist in the reduction of interest costs. Furthermore, many mortgage offset mortgages provide limitless transactions with no transaction fees, making it simple to manage your accounts and repayments online.
So, how exactly does offsetting work? The money in your transaction and savings accounts is merged and deducted from the balance of your mortgage, so you only pay interest on the difference. For example, if you have a $300,000 house loan and offset $25,000 of it with savings, you will only pay interest on $275,000 of your home loan. This implies that a larger portion of each installment is applied to the principal portion of your loan, allowing you to pay it off faster.
Sounds great – so what’s the catch? Employing a mortgage offset facility might bring several benefits, but it may not be the ideal decision for everyone. When determining whether to utilise an offset facility, examine your unique financial circumstances and objectives, and consider how you conceptualise money. In other words, if you’ve been trained to think in ‘positive buckets of money for different purposes’, an offset could work amazing. If you’re not too structured with your finances but know your incomes always greater than all your expenses, perhaps something like a ‘revolving line of credit’ could be something to consider.
The other catch is kind of a big one: Offset mortgages only come (currently) with floating interest rates. In New Zealand, often (but not always) the floating rate can be 1-2% higher than fixed rates. Not only is it possible to pay more interest (if in fact you don’t manage to maintain a healthy savings account), but you’re faced with interest rate risk on floating debt. A good loan structure is essential in maximising the benefits of an offset, without paying too much in the process.
Mortgage offset facilities (Total Money with BNZ, of Offset with Westpac and Kiwibank) may be quite beneficial to borrowers who want to pay off their house loans faster and save money on interest payments. Offsetting is a viable alternative for everyone looking for a homeloan because it incentivises us to save (nudging) for specific one-off events that we’re planning for.
As usual, please get advice from a qualified adviser before making a decision around what type of loan set up is good for you.