Offset mortgage calculator for New Zealand

What an offset mortgage is

In the offset loans summarised below, interest is worked out on the loan balance after the balance of your linked accounts has been taken off it. The savings are not used to repay the loan: they stay in your accounts and stay available, and the lender charges interest as if they had been paid in. Under that arrangement, if the linked balance is larger than the loan, no interest is charged while that is true. Other lenders’ products can differ.

The two banks summarised below describe it in much the same way. Their conditions differ, and neither summary is an endorsement of either product.

An offset may not be the cheaper loan

An offset loan generally carries a variable interest rate, and a variable rate can be higher than a fixed rate on offer at the same time. The offset reduces the amount that interest is charged on; it does not change the rate. Whether it works out cheaper than a fixed-rate loan depends on both rates, how large your linked balances are and how long they stay there, any fees, and what the same money would otherwise earn.

This calculator answers a narrower question: what does the offset change on the same floating rate, with the same repayments? It is not a comparison with a fixed-rate loan, and a saving shown here does not mean an offset beats one.

What this calculator models

It models the offset-eligible floating-rate portion of a mortgage, and only that portion. An offset is often one part of a split mortgage, with other parts fixed or floating without an offset. The rest of the mortgage is outside this comparison unless you model it separately.

The comparison is between that portion with the offset applied and the exact same portion, at the exact same rate, with no offset. Both pay the same scheduled repayment on the same dates. Interest is worked out day by day, so a balance that is high for a few weeks counts for exactly those weeks.

Each day the calculator takes the amount owed on the portion, subtracts the linked balance (never going below zero), and charges one day of interest on what is left. It is a daily model, not a per-period shortcut, because the whole point of an offset is that the balance changes from day to day.

Interest builds up daily and is applied on each repayment date, and it is not compounded daily. That is an illustrative convention. Lenders post interest on their own schedules, for example monthly on a set date whatever the repayment frequency, so real figures will differ. The same convention, day count, repayment dates and rounding are used for the loan with the offset and the loan without it, so the comparison between them is like for like.

Three numbers to keep apart

Total mortgage

Everything you owe on the home loan across all its parts. Used for context and to check the next number cannot be larger.

Offset-eligible portion

The part of the mortgage the offset applies to. This is what interest is calculated on, never the whole mortgage unless the whole mortgage is offset-eligible.

Linked balance

The combined balance of the accounts linked to that portion. It reduces the interest-bearing part of the portion; it does not reduce the other parts of the mortgage.

Take a $500,000 mortgage with a $100,000 offset-eligible portion and $30,000 in linked accounts. The offset applies to the $100,000, so $70,000 of it bears interest. The other $400,000 of the mortgage is not part of this calculation, and the $30,000 does nothing for it.

A worked example

On that portion, at 6.5% a year with $30,000 kept in the linked accounts and the repayment worked out for 25 years, the repayment is the same with or without the offset. With the offset, the portion is cleared about 8 years 7 months sooner and $69,621 less interest is paid in total.

In the first year, interest on the portion is about $2,009 lower. That figure assumes the linked balance stays at $30,000 for the entire period. If it does not, the saving is smaller, and the page shows how quickly it shrinks. These are illustrative figures, not a forecast.

Why the repayment does not go down

It is tempting to subtract the savings from the loan and recalculate a smaller repayment. That is not what an offset does. The scheduled repayment stays where it is. Because less of each repayment is taken by interest, more of it reduces the balance, and the loan is cleared sooner.

That is why this calculator reports time saved and interest saved, and does not report a lower required repayment. If the repayment you enter does not cover the interest charged on the portion, the balance does not fall, and the calculator warns you rather than showing a payoff date.

Because the offset portion is cleared sooner, its repayments stop sooner. On a split mortgage the calculator does not redirect that money anywhere. It reports how many repayments the loan without an offset would still have to make after that point, and it does not treat them as a saving. Where the money goes next, such as another part of the mortgage or your savings, is your decision and is outside this model.

The effective rate on the portion

Alongside the dollar savings, the page shows an illustrative effective rate on the offset portion: at the start it is the interest rate times the share of the portion that is still bearing interest (6.5% on $100,000 with $30,000 offset is about 4.55%), and over the first year it is the interest charged divided by the average balance.

It is a way to read the result, not an input to it. The calculator never uses one static effective rate to produce its numbers, because the effective rate changes whenever the linked balance does. It is also measured against the offset portion only, so it will not match a figure a lender quotes against a whole loan.

What this does not include

• Interest your savings would have earned elsewhere, and tax on it. Whether keeping money in linked accounts comes out ahead of keeping it somewhere that pays interest depends on the loan rate and on what the money would earn there after tax. This calculator does not model that.
• A comparison with a fixed rate. The comparison here is the same floating rate with and without the offset. An offset rate may be higher than a fixed rate, so an offset is not automatically better than a fixed-rate loan. Same-rate interest saved is not a complete fixed-versus-offset comparison.
• Rate changes over the loan. One rate is held for the whole period.
• Fees, except the single total you can enter. A lender may charge to set up or run an offset facility.
• The other parts of a split mortgage, and any lump-sum repayments.

Balances do not stay high forever

The biggest way an offset illustration misleads is by treating a temporarily large balance as permanent. A bonus, a tax refund or the proceeds of a sale make the saving look large for as long as the money sits there. The calculator therefore asks for a starting balance and an expected monthly change, and shows the saving at a quarter, half and all of the balance you entered.

Linked balances stay yours and stay accessible, but the amount of interest offset moves every time the balance does. If the balance falls, interest resumes on the part of the portion it no longer covers.

Common misunderstandings

• The offset does not use your savings to pay the loan. The money is still yours and still in your accounts.
• It applies to the offset-eligible portion, not automatically to the whole mortgage.
• It does not lower the required repayment. It shortens the loan and cuts interest.
• The interest saved here is for the stated balance staying put. A smaller balance saves less.
• Which accounts can be linked, and who can hold an offset loan, is up to the lender.