Offset mortgage - how to make the most of it?

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Forums › Finance and wealth management › Offset mortgage - how to make the most of it?

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#3349725 3-Mar-2025 19:12

MadEngineer:

We're with Westpac who had zero problems setting this up for us for our first home:

Dump all your savings etc into the deposit
Split the mortgage 50/50 fixed/floating
Wages go directly into the shared floating account (this was actually a requirement) with immediate interest rate offset. This is also the EFTPOS account.
Credit cards for a shared credit card account with automatic balance paid out of the floating account. Use this to pay for everything. This gives you up to 50 days of buffer before any payments come off your mortgage and you'll stack up the points.

This sounds closer to a revolving credit than my setup. I used to work for a bank and using wages and credit cards was how to utilise the revolving credit. But it requires more discipline than say the offset I have.

mudguard

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#3349726 3-Mar-2025 19:45

tweake:

but you need to always have more debt in the offset account than savings. easy way is say 25k savings with 50k debt, the rest of mortgage is fixed but you pay off the fixed as much as you can. if you have extra income or less expenses the 50k gets paid off. but every refix, make sure there's always plenty of debt in the offset, so you have something you can pay off if extra income comes along.

I'm not sure of the exact logic of this.

You're going to pay zero interest on $25,000, är the same time you're going to pay the floating rate on the other $25,000 of say 7% Why not just fix $25,000 and float the $25,000 to match the savings?

Yes if you're in surplus on the "savings" side (say you have $30,000) but it's also useful rainy day money. If I have to dip into the actual offset amount for any reason, say a major house or car repair, then I'll immediately pay the floating rate.

jonathan18

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#3349730 3-Mar-2025 20:05

Yeah, I was going to raise the option of a revolving credit. We had one for the full term of our mortgages with our current bank (about 18 years?); well, technically we still do have as we’ve not bothered discharging the mortgage though all loans were paid off in full a few years ago.

We operated it pretty simply in that we kept a proportion of our loan in the revolving credit and ensured enough of our savings were transferred into that account to counter any interest payments; any savings above this amount were maintained in savings accounts, with it rebalanced occasionally as loans came due, savings and spendings ebbed and flowed etc. (Also had three fixed loans that were staggered.) It did require managing it all on a spreadsheet to ensure a clean separation between mortgage and savings. I imagine an offset mortgage offers the same benefits without the same active management? (And, I imagine, less risk/temptation, given the line of credit is always available, even via the bank card.)

tweake

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#3349734 3-Mar-2025 20:38

mudguard:

tweake:

but you need to always have more debt in the offset account than savings. easy way is say 25k savings with 50k debt, the rest of mortgage is fixed but you pay off the fixed as much as you can. if you have extra income or less expenses the 50k gets paid off. but every refix, make sure there's always plenty of debt in the offset, so you have something you can pay off if extra income comes along.

I'm not sure of the exact logic of this.

You're going to pay zero interest on $25,000, är the same time you're going to pay the floating rate on the other $25,000 of say 7% Why not just fix $25,000 and float the $25,000 to match the savings?

Yes if you're in surplus on the "savings" side (say you have $30,000) but it's also useful rainy day money. If I have to dip into the actual offset amount for any reason, say a major house or car repair, then I'll immediately pay the floating rate.

yes, if you dip into the savings your paying floating rate. the same applies with EVERYTHING you buy. any purchase costs you floating rate as well. that really makes you want to not spend (and that mind set really works).

but you also have to remember that if you did it the old way of having a separate savings account at say 2%, you gain 2% but you loose 7%. so you loose 5%. an offset your gaining 5% until you use that savings.

don't forget where offset and revolving credit accounts shine, is all income goes to the mortgage instantly reducing it. then the bills come out and mortgage goes back up. however the longer you delay paying for something the more gain you get.

normally the float and fixed accounts are linked for the offset. however not sure what exactly happens if one goes positive. because the interest rate on a positive account is 0%. in theory you could have just savings in the offset and the savings will still go against the fixed because they are usually linked. it would pay to ask. if you couldn't link them then you need more mortgage than savings in the offset account to make sure you get that 5% gain not the 0%.

i never split mine. i just had floating which was fine for me.

SpartanVXL

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#3349735 3-Mar-2025 20:42

David321:

SpartanVXL:

There are calculators that will tell you exactly how much to offset given interest rates and your ability to increase your offset.

Sounds interesting, could you provide a ink?

https://mortgage.monster

NZ for some reason don’t showcase offset strategies unless you go looking for them. ANZ and ASB don’t do offset, only Westpac, BNZ and Kiwibank do.

Take a look at the Aussie side as they have a bunch of info/calcs available, just remove stuff like stamp duty thats specific to them.

tweake

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#3349736 3-Mar-2025 20:49

jonathan18:

Yeah, I was going to raise the option of a revolving credit. .......It did require managing it all on a spreadsheet to ensure a clean separation between mortgage and savings. I imagine an offset mortgage offers the same benefits without the same active management? (And, I imagine, less risk/temptation, given the line of credit is always available, even via the bank card.)

yes. revolving credit is dangerous in the wrong hands as all credit is available right up until the day its meant to be all paid back. there is a reducing revolving credit (i think only one small bank has it) which is similar but the credit amount gets reduced by the minimum payment every month etc. so your forced to pay the minimum payment. thats less risky.

the offset is more about savings. you have to save up money first, then use that against the mortgage, or buy what you need.

Handle9

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#3349738 3-Mar-2025 20:52

If you have excess funds above your revolving credit/offset you just dump the excess in a savings account or term deposit. You don't have to have all your funds in the offset or revolving account.

It's often not as good as reducing your mortgage cost but you can still make a small return while having zero cost rainy day money.

There are circumstances when reducing your mortgage doesn't have as good a return as investing the money, even in term deposits. I'm in that situation at the moment where I still have a year of very low interest rates on my NZ mortgage so I'm better off investing in term deposits than I would be offsetting.

It helps that as a non-tax resident I'm at the 10.5% income tax rate as the only investment I have domiciled in NZ is my rental property.

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jonathan18

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#3349743 3-Mar-2025 21:16

Handle9:

If you have excess funds above your revolving credit/offset you just dump the excess in a savings account or term deposit. You don't have to have all your funds in the offset or revolving account.

It's often not as good as reducing your mortgage cost but you can still make a small return while having zero cost rainy day money.

Though it can be combined quite easily, eg each time one of our fixed mortgages came up (as well as making use of being able to pay an additonal x% lump sum off each year without penalty), we’d pay off a chunk of that fixed loan using the additional savings that had built up (and was otherwise getting a lower rate of interest sitting in a savings account).

Our method certainly worked for us, but we were rigorous with how we managed it (and our spending more generally); and it’s a great feeling to mortgage free, especially as the brats are approaching uni age…

David321

485 posts

Ultimate Geek

#3349804 4-Mar-2025 06:44

Yeah I have been on revolving credit before and hated it, I was talked into it by a broker when I was young and did not know as much as I do know. I have always been good with money and had a spread sheet on excel I updated monthly which allowed me to differentiate between my repayment amount and extra savings I had in there (I like to keep savings separate). I got sick of the management a revolving credit takes if you want to keep an eye on how much extra you have put in etc and then switched to Kiwibank when offset became a thing here, you get exactly the same benefit in reducing interest charges with the benefit of separating money as you please. I can see revolving credit become a thing of the past when more people begin to understand offset mortgages, its telling that the banks hardly advertise this set up and only three banks here offer it.

One thing I noticed (and posted here about a while ago) was Kiwibank quietly slipped in a "Offset Ratio" to their terms and conditions for offset mortgages, to put it simply, they have given themselves the power to adjust the ratio of savings you make on interest with linked offset accounts, for example currently the ratio is one (and always has been), but they can at any time to adjust that ratio to 0.75, which would mean for every dollar you have in savings $0.75 of you mortgage debt would be interest free, pretty sneaky, and thankfully that have never adjusted it from the current "1".

The main thing I wanted to get to with this reply was a lot of people here have mentioned that an extra savings I acquire above my offset mortgage balance could be put in an interest earning account, which I am aware of, but I am trying to work out if it is best to try and avoid this in case I am better off to increase the offset balance to a sum that I believe my savings will catch up to by the end of that 6 months (or however long I fix the remaining portion), or is it more beneficial to simply put the offset balance at what my savings are at the start of the term and drip feed any savings I acquire above the offset balance into an interest earning account?

I have always sett my offset a bit higher than my savings balance with the goal of the two balances meeting in the middle at the end of the fixed term after the debt comes down with repayments and the savings increase with each pay, just wondering if I am better off doing it the other way mentioned above, but I have no idea how to work that out.

_David_

Handle9

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#3349806 4-Mar-2025 07:00

Honestly don't sweat it too much. Providing you are saving and making lump sum deposits or being disciplined on your revolving credit/offset you are doing better than 90% of the population.

Spending less than you earn is way more important than stressing about totally optimizing your mortgage strategy.

David321

485 posts

Ultimate Geek

#3349807 4-Mar-2025 07:12

Handle9:

Honestly don't sweat it too much. Providing you are saving and making lump sum deposits or being disciplined on your revolving credit/offset you are doing better than 90% of the population.

Spending less than you earn is way more important than stressing about totally optimizing your mortgage strategy.

I agree, I'm not sweating it either I just like to know how to best structure to maximize savings/earnings :)

_David_

jonherries

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#3349811 4-Mar-2025 07:34

Your savings will always earn less than you avoid on your mortgage (difference is rate margin and tax on income). That suggests always setting your offset higher than you can save is the better strategy hence my previous comment that you could think about it like an overdraft.

In addition having this bigger than you think you might reach might help motivate you to save more.

Jon

mudguard

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#3349816 4-Mar-2025 07:46

tweake:

yes, if you dip into the savings your paying floating rate. the same applies with EVERYTHING you buy. any purchase costs you floating rate as well. that really makes you want to not spend (and that mind set really works).

don't forget where offset and revolving credit accounts shine, is all income goes to the mortgage instantly reducing it. then the bills come out and mortgage goes back up. however the longer you delay paying for something the more gain you get

I suspect we are talking about two different products.

As mentioned earlier, the revolving credit requires considerably more discipline. An offset mortgage is a different product. It is more set and forget.

As you say, with a revolving credit you would have a loan of a smaller amount for this purpose. Lets use easy numbers.

$500,000 mortgage, lets say you fixed $450,000 of it and left $50,000 on a revolving credit. The idea is that you put any income earned into that account and put all your spending for the month on the credit card. So for thirty days or so that $50,000 reduced to $40,0000 while all the monthly expenses went onto the credit card. Obviously you've reduced the interest charged as there is thirty days with being at a low balance. You then pull the money back out of the revolving credit account to pay off the credit card and hopefully paid less interest as a result. But this requires discipline.

An offset account which is offered by some banks is simply that. You don't do anything with your salary. If you have a lump sum of savings you could use it to pay down the actual mortgage if you wanted, but that sum may be your rainy day account (which it is for me).

So the offset gives you a choice. Put in a regular savings account and get paid interest and have a regular mortgage. Or select an offset product and use that savings balance as an offset to give a mortgage rate of zero % for that amount.

So taking that $50,000 example, ideally you would have a floating loan balance of $50,000. That way you have your rainy day money sitting almost effectively in a cheque account so you can access it anytime, but if you don't touch it, it's reduced the floating balance interest rate to zero. So that's what I do, any excess money I have each month, I pay off my floating balance. So over the course of the year if I don't touch my savings I'm paying $1 off for every $1 I pay which is nice. Say by the end of the year my floating balance is now $45,000 and my savings are still $50,000, when one of my fixed loans comes off, I'll have them move $5000 over to the floating and start again.

I cannot see the point of having an offset balance higher than your savings. You'll simply pay 7% or so on this.

For the OP there is a calculator on Moneyhub. I get the following results. Say with $50,000

$50,000 over twenty years.

Fixed at 4.99% total interest paid $49,839

Offset with $25,000 in savings

Floating 7% total interest paid $34,957

Offset with $50,000 in savings

Floating 7% total interest paid, $0.

https://www.moneyhub.co.nz/offset-mortgage-calculator.html

Senecio

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#3349824 4-Mar-2025 08:32

jonathan18:

Yeah, I was going to raise the option of a revolving credit. We had one for the full term of our mortgages with our current bank (about 18 years?); well, technically we still do have as we’ve not bothered discharging the mortgage though all loans were paid off in full a few years ago.

Smart move. Friends of ours discharged their mortgage a few years ago and then found it very difficult to get new finance when they wanted to move. Your credit score drops significantly when you're not servicing a debt!

David321

485 posts

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#3349829 4-Mar-2025 09:22

@mudguard

Very well explained thank you, I understand you put extra money on you floating which makes perfect sense if you are that way inclined and if your savings is likely to sit idle at $50,000 that would certainly be the best thing to do in my (and i guess your) opinion.

My situation is similar, but the key detail which I believe could change everything is the fact I contribute to my savings on a regular basis, therefore its always (well mostly) growing, plus the offset balance is always coming down with repayments. Then obviously what you get almost instantly after the first repayment and savings contribution is a gap between the offset balance and total credit (savings), which is money sitting there not earning interest or offsetting interest.

I could do what you do and put the extra on the floating, but I like to keep my savings totally separate and accounted for which is why it goes into its own account.

In trying to minimise the size of that gap I figure the best option is to start off with a bigger offset balance than my savings and close that gap over the 6 months, with the ideal estimate being the gap closes right at the end of the fixed term, when I can then restructure and start again.

The only slight catch is I will pay 7% on that gap at the start, the other option I am tossing up is offsetting what I have saved at the time of the re-structure and placing savings in an interest earning account, the catch here is the returns are so much lower than having that money eventually off-set some debt.

Its catch 22 as far a I can see, just trying to find out the better option.

_David_

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