If you’re a homeowner in New Zealand or planning to become one, you’ve likely heard of “mortgage offset accounts.” But what is a mortgage offset account in NZ, exactly, and how can it help you save on the amount of interest you’ll pay? In this guide, I’ll unpack everything you need to know about mortgage offset accounts, how they work, and whether they’re right for your financial situation.
How a Mortgage Offset Account Works
The Basic Mechanics
A mortgage offset account is a transaction or savings account that’s linked to your home loan. The money in this account is used to offset the balance of your mortgage when calculating interest.
Example: If your mortgage is $500,000 and you have $50,000 in your offset account, you’ll only be charged interest on $450,000. This reduces the amount of interest you pay, potentially saving you thousands over the life of your loan.
Linked Accounts and Setup
Not all mortgages are eligible for an offset feature. You’ll need to set up your mortgage through a lender that offers offset facilities and ensure the home loan product supports it. Usually, your everyday transaction account is linked, allowing you to retain access to your funds while still reducing your interest.
Offset Accounts vs Revolving Credit
Offset accounts and revolving credit accounts are often used in similar ways — to reduce how much interest you pay on your mortgage. But they work slightly differently.
As mentioned above, you can have multiple accounts as an offset account which ‘offsets’ your loan balance and therefore reduces the amount of interest you’re paying fortnightly/ monthly.
A revolving credit account works a bit differently. It’s essentially a large overdraft that combines your income, savings, and spending into one single account (you can still have separate savings accounts but these will not be reducing your mortgage balance).
The goal is to keep as much money in the account as possible so that it lowers your loan balance and therefore the interest charged. This account also gives you access to your money whenever you need it, just like a normal transaction account.
Here’s an example of how someone might use this strategy. Suppose a couple has a $500,000 mortgage, $15,000 set aside as an emergency fund, and they expect to save another $15,000 over the year. They could split their mortgage into a $470,000 fixed-rate portion, and a $60,000 revolving credit facility. The $30,000 covers both their emergency fund and the savings they plan to build up throughout the year. Although the total mortgage is still $500,000, the money sitting in the revolving credit account reduces the interest they pay — just like with offset accounts.
At the end of the year, this couple can make a $15,000 lump sum payment when they refix their mortgage and continue with the same plan next year.
Pros and Cons of Offset Accounts
Benefits
- Interest Savings: You reduce the interest you pay without making extra repayments.
- Tax Efficiency: Unlike savings accounts, offset account balances don’t earn interest, so there’s no income tax liability.
- Flexible Access: You can still access your funds when needed.
Downsides
- Higher Fees or Rates: Offset loans are set at floating interest rates which are often higher than fixed interest rates.
Is an Offset Account Right for You?
Offset accounts aren’t one-size-fits-all. They are especially suitable for:
- People with stable, high savings balances
- Dual-income households with predictable cash flow
- Individuals who want liquidity while still reducing mortgage interest
If you’re the type of person who leaves most of your salary in the bank until bills are due, you could be making your money work harder with an offset account.
How to Set Up a Mortgage Offset Account in NZ
- Contact Your Mortgage Broker: You can contact us here.
- Link Your Account: Typically, you’ll link a savings or everyday account to your mortgage.
- Maintain a Healthy Balance: The more money in the offset, the greater your interest savings. Make sure your salary goes straight into this account(s) to maximise savings.
What is a Mortgage Offset Account in New Zealand?
A mortgage offset account is a savings or everyday transaction account linked to your home loan. The balance in the offset account is subtracted from your mortgage when calculating interest, meaning you pay interest only on the reduced amount. For example, if you owe $500,000 and have $50,000 in the offset account, you’re charged interest on $450,000 instead.
Can I still access my savings in an offset account?
Yes, but you’ll reduce the offset amount, which could increase the interest you pay on your mortgage.
Is it better than making extra repayments?
It depends. Offset accounts offer flexibility; extra repayments reduce the principal. Many people use a mix of both strategies.
