An offset mortgage in New Zealand is a home loan structure where your savings account balances are subtracted from your total loan principal before interest is calculated. Instead of earning taxable interest on savings, you save mortgage interest on the equivalent debt amount, effectively lowering your repayments or shortening your loan term.
What is an Offset Mortgage?
In the landscape of New Zealand personal finance, the offset mortgage is arguably one of the most powerful yet underutilized tools for homeowners who maintain cash savings. Unlike a standard term loan where your savings sit in a separate account earning a nominal interest rate (which is then taxed), an offset mortgage links these accounts directly to your home loan.
The core concept is efficiency. Banks in New Zealand typically charge mortgage interest rates that are significantly higher than the interest rates they pay on savings accounts. By “offsetting,” you utilize your savings to negate interest costs on your debt, rather than chasing low returns on your cash assets. This structure is typically applied to the floating (variable) portion of a mortgage, offering flexibility that fixed-term loans cannot match.
How Offset Mortgages Work in Practice
To understand the mechanics of an offset mortgage NZ homeowners use to slash debt, you must look at the daily interest calculation. Interest on a mortgage is calculated daily and charged monthly. With an offset facility, the bank looks at your total loan balance and subtracts the total balance of your linked savings accounts before running that daily calculation.
The Mathematics of Offsetting
Let’s assume you have a mortgage of $500,000 on a floating rate of 7.00%.
You also have $50,000 in savings sitting in a linked transaction or savings account.
- Without Offset: You pay 7.00% interest on the full $500,000.
- With Offset: The bank subtracts your $50,000 savings from the $500,000 loan balance. You are only charged interest on $450,000.
Crucially, the $50,000 remains yours. It is not “paid” onto the mortgage. It is simply sitting in your account, accessible at any time via EFTPOS or online banking. However, while it sits there, it is working as hard as a lump sum repayment.
The Hidden Tax Benefit: Avoiding RWT
One of the most compelling reasons to choose an offset mortgage in NZ is the tax efficiency regarding Resident Withholding Tax (RWT).
When you keep money in a standard savings account or Term Deposit, any interest you earn is considered income. The New Zealand government taxes this income at your RWT rate (which can be as high as 39% for high-income earners).
The Offset Advantage: Because an offset mortgage saves you interest rather than earning you interest, there is no income generated. Therefore, there is no tax to pay.
Example: If your mortgage rate is 7% and your tax rate is 33%, earning 7% in a savings account is actually only a 4.69% return after tax. By offsetting a 7% mortgage, you are effectively getting a guaranteed, tax-free return of 7%. To match this return in a taxable investment, you would need to find an asset yielding over 10.4%—a difficult feat with zero risk.
Offset Mortgage vs. Revolving Credit: What’s the Difference?
Many Kiwis confuse offset mortgages with revolving credit facilities. While both reduce interest using your available cash and apply to floating rates, they function differently structurally.
Revolving Credit
A revolving credit facility acts like a giant overdraft. Your loan and your checking account become one single account. You pay your salary directly into the loan, reducing the balance immediately. As you spend money on groceries or bills, the loan balance creeps back up.
Pros: Ultimate simplicity (one account).
Cons: Requires extreme discipline. It is psychologically difficult for many people to see a negative balance (e.g., -$450,000) and feel like they have “savings.” It is easy to spend up to the limit, effectively treating your home equity like an ATM.
Offset Mortgage
An offset mortgage keeps your loan account and your savings accounts separate. You can have multiple savings accounts (e.g., “Holiday Fund,” “Tax Account,” “Emergency Fund”) linked to one mortgage.
Pros: Better psychological compartmentalization. You can see your savings growing in their own accounts, yet they still reduce your mortgage interest. You can also link accounts from partners or parents (depending on the bank) to help offset the loan.
Cons: Slightly more administrative setup than a single revolving credit account.
Best NZ Banks for Offset Accounts
Not all New Zealand banks offer offset mortgages. Generally, the “big four” Australian-owned banks and Kiwibank have different policies. As of the current market, here are the key players:
Westpac Choices Offset
Westpac allows you to link multiple transaction and savings accounts to your floating home loan. A unique feature is the ability to link accounts held by your children or parents to your loan, provided they agree to it, allowing for inter-generational debt reduction.
BNZ TotalMoney
BNZ’s TotalMoney product is a market leader in this space. It allows you to pool up to 50 accounts. This is particularly popular with contractors who set aside GST and income tax; that money can sit in a separate sub-account offsetting the mortgage until tax day arrives.
Kiwibank Offset Mortgage
Kiwibank offers a robust offset product that allows you to link savings accounts from your partner, children, or parents. They emphasize the “keep your money separate” benefit, catering to those who want the financial benefit of revolving credit without the administrative mess.
Note: ANZ and ASB historically favor Revolving Credit facilities over pure Offset products, though policies change. Always check the latest product disclosure statements.
Case Study: Reducing Loan Term via Offsetting
To demonstrate the power of the offset mortgage NZ strategy, let’s look at a hypothetical scenario involving a couple, Sarah and Tom.
The Scenario
- Mortgage: $600,000
- Structure: $500,000 Fixed (1 year) | $100,000 Floating (Offset)
- Interest Rate (Floating): 7.5%
- Savings: They maintain an emergency fund of $20,000 and save roughly $1,000 per month.
The Outcome
Because Sarah and Tom keep their $20,000 emergency fund in a linked offset account, they are only paying interest on $80,000 of their floating loan immediately.
Furthermore, their monthly salary is paid into a transaction account linked to the offset. For the days that money sits there before bills are paid, it reduces interest.
Over a 5-year period, assuming they maintain the $20,000 buffer and add their monthly savings, they could save over $12,000 in interest compared to a standard floating loan. More importantly, because the mortgage repayment amount remains the same but the interest portion is lower, more of their payment goes toward the principal. This “principal acceleration” could shave years off their 30-year term if maintained.
Advanced Offsetting Strategies
For those looking to maximize this financial instrument, consider these advanced tactics:
1. The “Tax Bill” Offset
Self-employed contractors in New Zealand must hold significant cash for GST and Provisional Tax. Instead of letting this sit in a low-interest business account, move it to a personal account linked to your offset mortgage (consult your accountant regarding the structure). You use the government’s money to lower your mortgage interest until the tax due date.
2. The Fixed-Floating Hybrid
Don’t put your entire mortgage on offset. Floating rates are higher than fixed rates. The ideal strategy is to calculate how much you can save in 12-24 months (e.g., $30,000). Set your offset portion to $30,000 plus your current savings. Fix the rest of the mortgage to secure a lower rate. This ensures you aren’t paying a premium floating rate on debt you cannot offset.
People Also Ask
Can I access my savings if they are offsetting my mortgage?
Yes, absolutely. This is the primary benefit of an offset mortgage. Your savings are not locked away. You can withdraw them at an ATM or transfer them instantly. However, the moment you withdraw the money, it stops offsetting the loan, and you will be charged interest on that portion of the debt from that day forward.
Is an offset mortgage better than a fixed rate?
Not necessarily; they serve different purposes. Fixed rates generally offer lower interest rates and certainty of repayments. Offset mortgages (which use floating rates) have higher interest rates but offer flexibility and the ability to pay zero interest on the offset portion. Most borrowers use a “hybrid” approach, fixing 80-90% of the loan and keeping 10-20% as an offset.
Can I use my parents’ savings to offset my mortgage?
Yes, some New Zealand banks (specifically Westpac and Kiwibank) allow for family offsetting. This allows parents to help children get ahead without actually gifting them the cash. The parents retain control of their money in their own accounts, but the balance counts against the child’s mortgage interest calculation.
Does offsetting affect my credit score?
No, having an offset mortgage does not negatively impact your credit score. It is treated as a standard home loan. In fact, if the offset structure helps you pay down the principal faster, it improves your net asset position over time.
What happens if my savings exceed my mortgage balance?
If you have a $100,000 offset loan and $120,000 in savings, you will pay zero interest on the loan. However, you will generally not earn interest on the surplus $20,000 either (depending on the bank’s specific terms). At this point, it is usually financially prudent to pay off the loan entirely or move the surplus funds to an interest-bearing investment.
Do I pay tax on the interest I save?
No. The Inland Revenue Department (IRD) does not tax “saved expense.” Because you are not earning interest income, there is no RWT (Resident Withholding Tax) to pay. This makes offsetting highly tax-efficient compared to earning interest in a savings account.
