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?

David321

485 posts

Ultimate Geek

#318902 3-Mar-2025 12:10

Going to explain this the best I can, its one of those things that could be much more understandable when spoken - not typed!

I have always split my mortgage in to two portions, one fixed and the other offset.

I usually set the offset balance to what I expect to have save at the end of the fixed term, when I restructure and do the same again.

For example my mortgage could be 200k, i have 40k in savings, I fix for 6 months 150k and offset the remaining 50k.

I am then paying a low-ish rate on the fixed portion, and a high rate on the offset portion, but only 10k of that portion as my savings of 40k is off setting 40k of the offset debt.

I choose these numbers because I believe that in 6 months the offset mortgage would have reduced by 5k due to repayments and my savings would have increased by 5k to 45k - meaning that at the END of the fixed term my offset debt would be fully offset and incur no interest costs, even towards the end of the fixed term the interest costs on the offset account would be minimal.

Then when it's time to fix again I restructure the amounts and do the same again.

My question is, is this the best way to do things? the only other option I see is to set the offset balance at what my savings are at the START of the term, this way there would be no interest charged on that portion at all but the catch would be as the repayments knock that debt down and my regular savings increase I would have a portion of cash sitting in that savings account which is not offsetting anything, nor would it be earning interest as that savings account is set up to offset my mortgage and therefore does not earn interest.

I understand I could put any cash from the savings account above the balance of the offset balance into a savings account, even though the returns are so low anyway.

I am trying to work out what the better option is here, set the offset balance to where I think my savings will be sitting in 6 months time when the term is up (factoring in the repayments reducing the debt balance also), trying to get the offset balance and savings balance to be the same at the end of the term, or setting the offset balance to be what my savings are at the start of the term and then putting any cash above the offset balance into an interest earning account?

The numbers and balances are hypothetical to simplify things and I understand the difference between the interest rate of the offset account (6.75%) and returns on savings account (about 2.8%) would be a factor, along with the 28% tax on returns but I think this gap would stay roughly the same as interest rates go up and down.

_David_

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2114 posts

Uber Geek

#3349562 3-Mar-2025 12:28

I do something slightly similar. My loan is split in four, three fixed and one floating.

The floating is just less than my savings balance. So every spare dollar I pay into the floating.

When my floating loan gets more breathing room between it and the savings balance, when one of the fixed comes off it's term I might move some of it into the floating balance and start again.

My logic is given that I'm a recent home owner, a dollar paid off the floating balance is a dollar less I owe.

Now I could pay more than required against the fixed terms which would shorten the actual length of the mortgage (which is what I did at the start) but changed this last year once my cheaper rates rolled off and I had less wiggle room between the minimum and what I was over paying.

David321

485 posts

Ultimate Geek

#3349563 3-Mar-2025 12:31

mudguard:

The floating is just less than my savings balance. So every spare dollar I pay into the floating.

Do you mean your floating is just "more" than your savings balance?

_David_

wellygary

8312 posts

Uber Geek

#3349564 3-Mar-2025 12:35

Such an approach also work better when interest rates are falling,

As it gives you quick exposure to a falling OCR via the "offset" portion... ( on the flip side the offset rate will be higher than your fixed portion.)

But in a rising interest rate environment such an approach is much less inviting..

concordnz

472 posts

Ultimate Geek

Trusted

EMT (R)

#3349616 3-Mar-2025 12:57

Two answers to this,

both are correct.

It all depends how you 'emotionally' view a number?

1)Do you prefer to see a small negative number, getting smaller and approaching zero?

2) Do you work better with seeing a positive number getting larger?

Whichever way works best for you is right.

there is very little difference over just a 12mo period

(I personally prefer option 1, and I find I 'save' more - and am less likely to 'spend' some of thoes savings, like I am, when the number is in positive. - that extra savings, far out weights the small additional interest cost, by having it in negative to start with)

I did try with a 50/50 approach - with the negative crossing into positive at the 6mo point, but I found I then 'saved' less in the second 6mo periods when it was in positive.

mudguard

2114 posts

Uber Geek

#3349621 3-Mar-2025 13:17

David321:

mudguard:

The floating is just less than my savings balance. So every spare dollar I pay into the floating.

Do you mean your floating is just "more" than your savings balance?

No, for arguments sake my savings are $25,000 and floating is $20,000, so I'm paying zero interest at all times

debo

307 posts

Ultimate Geek

#3349631 3-Mar-2025 14:07

There was another way i used for my mortgage. The loop hole may have closed since I did it.

I set my weekly repayment to a massive amount. I think it was about 50k per week. Then I immediately reduced it to a sane amount. The bank would let me change the repayment amount once or twice per year if my situation changed. If I ever won lotto I could then increase the amount back to the initial 50k per week with NO PENALTY INTEREST. They would only charge penalty interest if you exceeded your initial weekly repayment . And they did not care if you reduced weekly repayments.

This was with BNZ.

Unfortunately I did not win lotto so never had an opportunity to use it.

alasta

6703 posts

Uber Geek

Trusted

Subscriber

#3349634 3-Mar-2025 14:16

You need to be clear what you consider to be 'savings'. In my case the offset includes cash that I have set aside to cover accrued depreciation on my car, contingencies, and funds set aside for things like insurance, rates, travel and future household appliance purchases. These things ebb and flow, and it's very difficult to accurately predict your cashflow even with a detailed analysis.

I would just set the offset portion to a figure that would be a 'normal' amount of cash for you to hold over the long term and accept that there will be some random variation.

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wellygary

8312 posts

Uber Geek

#3349642 3-Mar-2025 14:55

debo:

There was another way i used for my mortgage. The loop hole may have closed since I did it.

.....

Unfortunately I did not win lotto so never had an opportunity to use it.

So to use your "loop hole" you required the stars to align and to correctly pick a bunch of weekly random numbers... :)

jonherries

1395 posts

Uber Geek

Trusted

Subscriber

#3349650 3-Mar-2025 15:19

alasta:

You need to be clear what you consider to be 'savings'. In my case the offset includes cash that I have set aside to cover accrued depreciation on my car, contingencies, and funds set aside for things like insurance, rates, travel and future household appliance purchases. These things ebb and flow, and it's very difficult to accurately predict your cashflow even with a detailed analysis.

I would just set the offset portion to a figure that would be a 'normal' amount of cash for you to hold over the long term and accept that there will be some random variation.

I think this is a really good point. The way I think about it is as an overdraft at your mortgage rate rather than personal loan rate.

I also think you need to match your ability to pay the overdraft off with the timing of the fixed component (you don’t want cash sitting around). The other big part of these mortgages is the use of a credit card which you pay off in full every month. Even with just supermarket and petrol costs for lots of people it is worth it.

Jon

debo

307 posts

Ultimate Geek

#3349676 3-Mar-2025 16:31

wellygary:

So to use your "loop hole" you required the stars to align and to correctly pick a bunch of weekly random numbers... :)

Any sort of extra money would do. Work bonus, inheritance, pay rise, lotto.

The point was to pay off the mortgage directly instead of putting the extra funds into a savings account until you refinance

SpartanVXL

1306 posts

Uber Geek

#3349679 3-Mar-2025 16:52

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

David321

485 posts

Ultimate Geek

#3349689 3-Mar-2025 17:18

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?

_David_

tweake

2391 posts

Uber Geek

#3349704 3-Mar-2025 17:56

mudguard:

No, for arguments sake my savings are $25,000 and floating is $20,000, so I'm paying zero interest at all times

the problem with that is your loosing the benefit of savings interest on the $5k. (with offset accounts you give up savings interest)

so really you want to make sure you owe more than what your savings is. however offset accounts you link up all the accounts anyway. so if you have -20k in one and -100k in another, the 25k goes against the -120k.

tweake

2391 posts

Uber Geek

#3349705 3-Mar-2025 18:07

David321:

The numbers and balances are hypothetical to simplify things and I understand the difference between the interest rate of the offset account (6.75%) and returns on savings account (about 2.8%) would be a factor, along with the 28% tax on returns but I think this gap would stay roughly the same as interest rates go up and down.

first thing is you typically give up interest on savings in an offset account.

your always better to put money against the mortgage than in a separate savings account. thats the whole point of offset is you can have savings for a rainy day without penalty.

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.

MadEngineer

4271 posts

Uber Geek

Trusted

#3349707 3-Mar-2025 18:10

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.

The floating, despite being a higher interest rate was paid off twice as fast as the fixed.

From the start, the floating account ended up with an avail balance of our deposit, meaning we always had money available for any emergency and we weren't living week by week. It's not suitable for those that are not careful with their money.

Have done the same for our 2nd house.

Looks like this:

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