An offset mortgage is a type of home loan where the borrower’s savings account is linked to their mortgage account. The balance of the savings account is then ‘offset’ against the mortgage balance for the purpose of calculating interest.
In other words, instead of earning interest on your savings, you pay less interest on your mortgage. Interest is only charged on the net difference between the mortgage balance and the savings balance.
For example, if you have a mortgage of $200,000 and you have $20,000 in your linked savings account, you would only be charged interest on $180,000 ($200,000 – $20,000). However, it’s important to note that while the savings balance reduces the amount you’re charged interest on, it doesn’t reduce the mortgage balance itself. You still owe the same amount, but the cost of borrowing can be significantly less.
An offset mortgage can be a great way for borrowers to reduce their mortgage interest costs, and possibly shorten the term of their loan. However, it’s important to understand that not all mortgage products offer this feature, and there may be higher fees or interest rates associated with mortgages that offer offset features. As always, it’s important for borrowers to evaluate the terms and conditions carefully and consider seeking advice from a financial adviser to determine what makes sense for their individual circumstances.
Example of an Offset Mortgage
Now, let’s say you have a savings account linked to this mortgage, and it has a balance of $50,000.
With an offset mortgage, the interest on your mortgage would be calculated on the net balance of the mortgage after offsetting the savings account balance. This means the interest would be calculated on $450,000 ($500,000 mortgage – $50,000 in savings), not the full mortgage amount.
At a 4% interest rate, the interest for the year on $450,000 would be $18,000.
So, by having $50,000 in your linked savings account, you’ve effectively saved $2,000 in interest payments for the year ($20,000 – $18,000).
As you can see, the benefit of an offset mortgage is that the more money you have in your linked savings account, the less interest you pay on your mortgage. If managed well, this could potentially lead to significant savings over the life of the mortgage and could even result in an earlier mortgage payoff.
However, it’s important to keep in mind that this is a simplified example and actual savings would depend on various factors, including the interest rate, mortgage balance, savings account balance, mortgage terms, and more. Also, some lenders might charge higher rates or fees for offset mortgages, so borrowers should carefully review the terms and conditions.