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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mudguard

2114 posts

Uber Geek

#3349831 4-Mar-2025 09:38

David321:

@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.

Yes to be fair my savings are definitely more idle. I have an upcoming job change so prefer the certainty about costs etc. That's good that you are increasing savings. It really comes down to a goal I guess.

If you are saving for a particular goal that you will need it for, then it makes sense to keep it separate. When I bought the home, I wanted to get back to six months pay saved as quickly as possible, once I reached that, I started putting my "unspent" income towards my floating loan. I work in finance and get paid monthly so prefer to keep things simple nonetheless. I still track my kiwisaver and mortgage balance each month as I like to see what I owe coming down in real terms.

As I'm sure you're aware the mortgage balance drops depressingly slowly compared to the repayments. NB to be fair I've been attacking the floating loan more aggressively recentl, as I bought when the rates were low, so set my fixed repayments as much above the minimum as I could. But as the rates went up, I've had less of buffer between what I could afford and what the minimum repayment was. So the fixed are all set just above the minimum, and the surplus I now use towards the floating loan as it's dollar for dollar.

SpartanVXL

1307 posts

Uber Geek

#3349847 4-Mar-2025 10:59

There is a calculator somewhere that factor in earnings if you had them elsewhere instead of servicing your mortgage but the main disincentive is that you’re likely paying tax whereas offsetting is 1:1 on the floating rate.

The ties into the other benefit of offset vs something like revolving credit. Family can attach their saving accounts to the offset too without much of the legal stuff needed around lending money. Often better to offset vs the taxed income interest for most people.

tweake

2391 posts

Uber Geek

#3350064 4-Mar-2025 18:46

mudguard:

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.

if that offset balance is lower than your savings, that extra savings is dead money. sure its not attracting interest but its not going against any either. it does nothing. ideally you want to match savings to mortgage. but offset account will bounce around a bit as money goes in and out. if you save more than the offset mortgage then you best to pay off more of the fixed. however there is limits on how much fixed you can pay off. thats where you want a bit more offset mortgage so you have something to pay off with any extra.

i suspect main reason offset accounts are not pushed as much is simply almost no one has floating mortgages these days. due to the insane overpriced houses, almost everyone is fixed rate.

what i was taking about where revolving credit and offset both shine, is they both go against the mortgage instantly. eg you get paid $10k, thats $10k off a $500k mortgage so interest is only on $490. as interest is calculated daily, every day you can put off paying bills the less interest you pay. thats really handy for those of us who get paid monthly. ie i pay the bills in the last week of the month, so thats 3 weeks of less interest.

yes revolving requires more discipline and is more risky. but some situations it can be very useful like having irregular pay or paid at end of contracts etc. otherwise offset is much safer.

mudguard

2114 posts

Uber Geek

#3350132 4-Mar-2025 20:00

tweake:

i suspect main reason offset accounts are not pushed as much is simply almost no one has floating mortgages these days. due to the insane overpriced houses, almost everyone is fixed rate.

12% of total loans are floating. But lots of new lending is floating.

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