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What is an offset mortgage?

An offset mortgage lets you use money in a separate account (savings or everyday) to effectively reduce the balance of your mortgage when it comes to calculating the interest charged. The money stays in its own account and is available as usual, but simply offsets your home loan balance – hence the name.

How does an offset mortgage work?

Let’s say you have an offset mortgage with $500,000 owing and $10,000 in a savings account that’s linked to it. That means you will only pay interest on $490,000. If you add to your savings, you’ll pay even less interest. But if you withdraw from your savings, the interest charged on your offset mortgage will increase.

Does an offset savings account still earn interest?

Not usually. The money in an account linked to your offset mortgage is unlikely to earn interest, but some lenders do pay interest on a linked account balance over $100,000. However, since the interest rate on your mortgage is higher than the interest rate applied to positive balances in the offsetting account, the interest you avoid paying on your offset mortgage will be more than your savings would have earned.

Can you link more than one account to an offset mortgage?

You can choose to link several accounts if you wish; they just have to be with the same bank as your offset mortgage. Your parents and other family members can also choose to link their accounts with the same bank to your offset mortgage. They won’t earn interest on positive balances, but they will help to reduce the interest you have to pay on your offset mortgage. They maintain sole access to their linked accounts and can withdraw or add to them as they choose.

What is the offset mortgage interest rate?

Offset mortgages have a floating or variable interest rate, which is usually higher than fixed interest rates. For this reason, it pays to offset as much of your mortgage as you can. Many people choose to split their home loan borrowing between an offset mortgage and a fixed interest rate mortgage. For maximum benefit, it’s smart to match the amount borrowed through the offset mortgage to the savings balance you have now or will soon achieve. This means you’re paying no (or very little) interest, but still have access to the savings balance if you need it.

Can you make lump sum repayments with an offset mortgage?

Because they have a variable rate, you can make lump sum repayments to an offset mortgage whenever you like. They’ll permanently reduce the amount owing and the interest you’re charged each time. They also mean you’ll repay the mortgage earlier, further reducing your overall interest paid.

However, once you’ve made a lump sum repayment you can’t draw it down again like you can with a revolving credit mortgage. If you need to borrow the lump sum again in the future, you’ll have to apply for a new mortgage and pay the associated fees for doing so.

How do the regular repayments for an offset mortgage work?

With an offset mortgage you make a regular fortnightly or monthly repayment towards interest and principal (the amount you owe). These minimum repayments are designed to ensure your mortgage will be fully repaid by the end of the agreed term. As the variable interest rate increases or decreases, your regular minimum repayments can go up or down.

The more savings you have linked to your offset mortgage, the less interest you’ll be charged. But your regular minimum repayments remain as they would with no offsetting. This means you’ll repay more principal each time, so you’ll be mortgage-free sooner and significantly reduce the total cost of your loan.

You can increase your regular repayments if you want to repay your mortgage even faster. This will also reduce your regular interest charges, so more principal gets repaid each time – further shortening the time until your mortgage is fully repaid. See our mortgage repayments calculator. 

Who should consider an offset mortgage?

An offset mortgage can be a good option for people with savings they expect to have available for some time. For example, people with an emergency fund for peace of mind can use it to save costs and become mortgage-free sooner, while still keeping the fund separate, intact and readily available.

Some parents suggest their children get an offset mortgage, so they can help them with the cost of owning a home. They don’t want to gift the money directly, but are happy to forgo the interest to help their children.

Offset mortgages may not be a good idea for people who are tempted to spend their savings. The interest charged on an offset mortgage is higher than a fixed interest mortgage, so spending some of the offsetting savings can be expensive – especially if it ends up taking a while to build the savings back up.

What can you do if an offsetting mortgage isn’t working out?

If you need to withdraw the savings in an account linked to an offsetting mortgage, your interest charges and regular repayments will immediately increase. If there’s no chance the linked savings will be restored in the near future, you may find yourself in an expensive and challenging financial situation. To avoid problems, you can usually switch to a cheaper standard fixed interest mortgage. However, there will be costs involved, such as fees to close the offsetting mortgage and establish the new one.

What’s the difference between an offsetting and revolving credit mortgage?

  • Both of these options let you use savings to offset the balance of your mortgage and pay less interest. The two main differences are:
    With an offsetting mortgage the linked savings are in separate accounts, but a revolving credit mortgage is a single ‘all-in-one’ account, like having a large overdraft
  • An offsetting mortgage is steadily repaid over an agreed term, but with a revolving credit mortgage you only have to pay the interest owing each month. Revolving credit mortgages also let you make repayments or withdraw up to the original agreed limit whenever you choose – although some lenders offer the option of a steadily reducing credit limit.
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