An offset mortgage links your savings account directly to your home loan. The bank calculates interest only on your loan balance minus the savings sitting in your offset account. That daily interest saving adds up to thousands of dollars over a loan's lifetime, and reduces your loan term by years. The effective return on offset savings equals your mortgage interest rate, completely tax-free, because you are not earning interest income. You are simply reducing interest expense. For most people on a 33% or 39% marginal rate, this beats any term deposit or PIE fund after tax.
Enter your loan balance, rate, and offset savings to see the interest saving, term reduction, and comparison with alternatives
An offset mortgage links a transaction or savings account to your home loan. Instead of paying interest on the full loan balance, the bank calculates daily interest on the net position: your loan balance minus the balance in your linked offset account. If your mortgage balance is $550,000 and you have $50,000 in your offset account, you pay interest on $500,000 each day the $50,000 remains in the offset.
Importantly, your monthly repayments stay the same as for a standard mortgage. The reduction in interest means more of each payment goes toward reducing the principal. This is why offset accounts shorten the loan term rather than reducing monthly payments. The accelerated principal reduction compounds over time, because each month you owe less, which reduces the interest calculation further, which sends even more to principal.
ASB offers offset functionality through its Total Home Loan package, linking transaction and savings accounts against the mortgage balance. ANZ offers offset on its home loan products in some configurations. BNZ has an Offset Home Loan product. Westpac offers offset on eligible home loans. Kiwibank and some other lenders offer revolving credit facilities which function similarly to offset mortgages, with the entire account balance floating against the mortgage. Contact your bank or a mortgage broker to confirm current offset product availability and terms, as product structures change.
The most compelling reason to use an offset account rather than a term deposit for your savings is the tax treatment. Interest earned on a term deposit is taxable income, assessed at your marginal rate. Interest savings from an offset account are not income at all. They are simply a reduction in an expense. There is no IRD form to file, no end-of-year tax to pay, and no PIR rate to manage.
For a person on a 33% marginal rate with a 6.75% mortgage, the offset account delivers an effective 6.75% tax-free return. To match this with a term deposit, the deposit would need to pay 6.75% divided by (1 minus 0.33), which equals approximately 10.07% gross. No term deposit in the New Zealand market pays that. For someone on 39%, the equivalent gross return needed is even higher: 6.75% divided by 0.61 equals approximately 11.07%.
No, not immediately. Your scheduled repayments stay the same. The benefit manifests as a shorter loan term, because more of each fixed payment goes to principal. Some banks allow you to apply for a repayment reduction once you have built significant offset savings, but the default arrangement is a term reduction rather than repayment reduction.
Your offset savings can be withdrawn at any time. They are not locked in. When you withdraw, the effective interest-bearing balance increases and your interest for that day rises accordingly. Most people use their offset account as their main transaction account, with salary going in and bills going out, maximising the days their money reduces the mortgage.
They are similar but structured differently. A revolving credit facility combines your loan and savings in one account. You can draw up to a limit and repay freely. An offset mortgage keeps the loan and savings in separate accounts but links them for interest calculation purposes. Both achieve a similar outcome of reducing effective interest. Revolving credit requires more financial discipline because it is easy to spend the equity you have built up.
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