Who's getting on the offset mortgage bandwagon?

Personal Finance

BNZ borrowers save $480m in interest over 10 years through offset mortgages; Mortgage brokers say first home buyers with wealthy parents generally not among these

11th Oct 17, 9:38am by Jenée Tibshraeny

First home buyers are tapping in to the ‘Bank of Mum and Dad’, but not through offset mortgages.

Rather, the product which BNZ first launched in New Zealand in 2007, is mainly being used by home owners keen to keep a bit of capital aside to do renovations, invest elsewhere or keep as a rainy day fund.

Offset mortgages enable borrowers to not pay interest on X amount of their floating loans, if they have X amount of savings they’re willing to not receive interest on.

Borrowers can use both their savings, as well as those of others’ to write off their interest. In fact, they can connect numerous accounts to their mortgage, provided the accounts are all at the same bank.

So if a first home buyer has a $400,000 mortgage, and their parents have $100,000 sitting in a savings account with the same bank, the parents can forgo receiving interest payments on their savings, so their child doesn’t have to pay interest on $100,000 of their mortgage.

Given mortgage rates are higher than savings rates, this can be an attractive option.

While a borrower can only offset the floating part of their mortgage, they can fix as much of their loan as they like.

Borrowers will also be charged for offsetting ($10 a month in BNZ’s case).

Offset mortgages are offered by BNZ, Kiwibank and Westpac.

Offset mortgages being used by minority with decent chunks of spare cash

BNZ’s retail and marketing director, Paul Carter, says the uptake of the product has been “pleasing”, with BNZ borrowers saving $480 million in interest since 2007.

Looking at it another way, BNZ’s TotalMoney offset mortgage product makes up around half of its variable loan book.

However mortgage brokers say there hasn’t been a great deal of interest in offset mortgages - especially not from first home buyers.

Go2Guys’ Campbell Hastie and Your Home Loan’s Andrew Perry say the sorts of people interested in offset mortgages are those who aren’t throwing every cent into the purchase of a house.

This might include those keen to keep cash aside to upgrade their home, buy another property, or use the money for a business operation.

These observations aligns with Carter’s comments, as he notes those using TotalMoney generally have enough savings to offset half of their loans.

40% LVR rule means investors need their cash

Hastie says borrowers keen to tie in their funds with their mortgage have two options; use an offset mortgage or revolving credit.

“One’s just a reverse of the other,” he says.

“The difference though is psychological rather than financial, and it’s that you can see your money sitting there in its own bucket. If you need to see it, and you don’t want to see it mingled up in the mortgage, which is the revolving credit option, then offset is a great way of doing it.

“Price, interest rate and fees wise, offset and revolving credit look identical.”

However, Hastie recognises: “Most people are putting everything they’ve got into the purchase price. They’re not really hanging on to a lot for rainy day money. Either because they can’t, or because they see more sense in having a smaller mortgage.”

With the introduction of the Reserve Bank’s loan-to-value ratio restrictions, which require investors to have 40% deposits, he says investors need all the money they can get.

“I would say a lot of investors don’t actually have a lot of cash floating around, especially if they’ve made a purchase recently.”

‘Bank of Mum and Dad’ either gifts money or doesn’t help at all

As for people getting on the property ladder for the first time, he says: “I definitely see instances of family helping first home buyers - definitely.”

However this help is coming in the form of cash, rather than these sorts of arrangements.

Parents who can, are telling these kids, ‘Here’s the money, take it and use it’.

“I’ve never seen anyone want to have the ability to grab that cash back,” Hastie says.

Perry is on a similar page. He says: “Offset mortgages don't really help first home buyers as any money offsetting the loan doesn't impact on the bank’s credit decision.

“More common ways to help would be with… family guarantee type loans, gifted funds or via deed of acknowledgement of debt.”

However Perry says: “The biggest factor in first home buyer loans would be KiwiSaver. This is something I see in 90% of applications.

“In Auckland this generally means no Homestart Grant is available due to the house price caps, but the first home buyer withdrawal is still very useful - especially with the government tax contributions and employer contributions.

“For a couple on $50,000 each, if they max out their KiwiSaver at 8% and get the 3% from employer on top, plus government contributions, they're at almost $13,000 a year without any additional savings of their own.

“After four years they would have around $50,000, and some banks will lend to first home buyers in the current market with 5% deposits, so if you're looking at an [Auckland] entry level property between $600,000 and $700,000, then there are options out there.”

Offset mortgage rates

BNZ TotalMoney: 5.90%.

Kiwibank Offset Mortgage: 5.80%.

Westpac Choices Offset: 5.95%.

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24 Comments

by J.C. | 11th Oct 17, 4:23pm 1507692227

Just another way to make the banks get a good nights sleep and bump up their capital req'ments. Furthermore, it would be interesting to know how many h'holds with mortgages actually have 30K lying around to keep in a bank account. Approx 70% of Australian h'holds have less than 30K in cash savings, so it is probably only the bank of mum and dad in the other 30% that this works for. Given the ridiculous asset price inflation, I could see a few people being sucked into this.

https://www.mebank.com.au/media/2511295/Household-Financial-Comfort-Rep…

by Hardly | 11th Oct 17, 5:24pm 1507695846

I have an offset mortgage - originally with BNZ and then later with Kiwibank. I keep a chunk of change in an offset account as a rainy day fund. The theory being that if I ever got into financial trouble due to losing my job, the bank would be unwilling to loan me extra money or defer payments. So by keeping the money separate I have a nice cushion. I tried to get the bank of mum and dad in on the deal but they didn't really understand how such an arrangement would work. The challenge with offset is you need to keep the numbers balanced, if the offset part of the mortgage is higher you are likely paying too much interest, if the amount in your offset account is higher you are likely getting paid measily interest. So you need to predict your savings/mortgage balance, take advantage of early repayments, watch your fixed terms, etc. to keep things nicely tuned.

by Hardly | 11th Oct 17, 5:25pm 1507695928

I have always wondered, if the bank goes bust, is it possible to lose the money in the offset account but still owe the full value of the mortgage?

by midgetkiwi | 11th Oct 17, 7:32pm 1507703576

"They’re not really hanging on to a lot for rainy day money. Either because they can’t, or because they see more sense in having a smaller mortgage.”
Can anyone help me out with the logic of this comment from the middle of the article?
I can't find the more sense in having a smaller mortgage if the alternative is to offset it.
ie: 100k mortgage no cash in bank,
vs.
200k mortgage, 100k cash in bank offsetting it
Same interest paid, but I would prefer the bigger mortgage, as inflation would help more over time, non-existent though it is

by J.C. | 11th Oct 17, 7:57pm 1507705028

He's saying that the representative borrower doesn't have much cash at hand, and if they do, they think it's wiser to reduce debt. It's important to understand consumer attitudes.

Your logical argument about inflation reducing debt over time is something that most people need the rethink. Sure, it worked in the past, but there is no guarantee that it will work in the future. Inflation is not some kind of natural phenomenon that affects all variables equally. You might find that wage and income inflation has run its course, particularly in the Anglosphere.

by midgetkiwi | 12th Oct 17, 1:54pm 1507769697

Agreed JC, thanks for the reply. However unless we are in a deflation environment, which is possible, isn't it still better to offset than have a smaller debt? I don't understand how a smaller debt would be beneficial.

by MortgageBelt | 11th Oct 17, 9:49pm 1507711798

The other factor is the very high floating interest rate of 5.95%.
400k mortgage at 5.95% with 200 k savings offset = 200k at 5.95%
400k mortgage - early repay of 200k = 200k at 4.4% fixed, so room for $3100 pa additional savings/alt investment less tax.

by kiwimm | 12th Oct 17, 9:12am 1507752736

For the best of both worlds, you should have a $200k fixed mortgage and $200k floating offset by $200k savings.

It is normally better to keep floating the amount you could pay off in a year and fix the rest. This way your income is offsetting cost through the year, effectively earning interest at the floating rate, tax free.

by Zachary Smith | 12th Oct 17, 9:28am 1507753701

Borrow 400K while keeping 200K cash in the bank? Wouldn't it be better to borrow less and have a high value revolving credit facility?

by Fluid36 | 12th Oct 17, 9:31am 1507753868

Better to have the option to negative gear maximum debt balance in the future. Otherwise there is no difference either way really so no advantage in draw down or credit over offset.

by rastus1 | 12th Oct 17, 9:32am 1507753937

..well that's my preference Zach. Unless you think the OBR rules are just for fun, i'd prefer to avoid the risk.

by kiwimm | 12th Oct 17, 10:23am 1507756981

My understanding is that under an OBR event, the offset savings would be frozen and any revolving credit facilities called in so you would be in the same position

by rastus1 | 13th Oct 17, 8:25am 1507836312

Mary Holm

"With a revolving credit mortgage, you put your income and savings into the same account as the mortgage, reducing your mortgage balance. Because the balance is negative - you owe the bank - that account wouldn't be affected by OBR.

On the other hand, with mortgage offset, your mortgage balance is offset against positive balances in other accounts, and those accounts could be affected by an OBR "haircut".

http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj…

by kiwimm | 12th Oct 17, 9:34am 1507754074

This is effectively the same as above. You keep the ability to borrow $400k whilst only paying interest on $200k. When the next buying opportunities come is when the banks will be restricting credit so liquidity is king.

by Fluid36 | 12th Oct 17, 2:14am 1507727684

You Kiwis don't really understand how to use an offset account do you? In Aus they are very popular and for good reason. The idea is to combine offset with interest only, you have all incoming payments going into your offset account (salaries etc) and just the interest on the loan paying out. Therefore you get maximum offset of the debt even without a large cash sum as any extra money gradually builds up. In the end even though you are not paying the principle of the loan you are 100% offset and your loan is effectively paid off. During this duration you have paid the minimum amount of interest possible. The other advantage is that if you ever want to turn the property into an investment you can put the offset funds into your new PPR and gain maximum negative gearing on the old PPR at 20% LVR (or 40% as in the case of NZ)

by J.C. | 12th Oct 17, 12:44pm 1507765486

I think you don't get it. Offset accounts are designed to modify your behavior to the advantage of the bank (read my comment above). If they represented an opportunity whereby the house lost its advantage to the punter, it wouldn't exist.

by Fluid36 | 13th Oct 17, 10:29pm 1507886974

I think you're the one who doesn't get it, I just described the advantage in regards too being able to turn your PPR into a negative geared investment in the future. This is an obvious advantage to the so called punter and no skin off the banks nose. Try using your brain.

by russellj | 12th Oct 17, 11:06am 1507759589

We have 400k on fixed and 100k on offset with Kiwibank with 60-70k on avg in the offset saving account as emergency cash and Reno money and just cash. On avg we pay about 40 dollars a month interest.Really happy with it. Also prefer that we are paying P&I on the offset and because we pay the same amount each month regardless of the level of offset interest we are reducing our loan faster with the confidence of still having cash on hand. If needed we could pay our cash to reduce the mortgage right now but no need, we like having ready access to our cash.

by Carlos67 | 12th Oct 17, 5:10pm 1507781459

A better idea is just up your repayments. Cannot believe how much money some people put aside or they are just not repaying the mortgage fast enough and wasting money. Just bang the numbers into a calculator and watch years drop off it by paying another $50 a week.

by speckles | 12th Oct 17, 5:16pm 1507781802

Its balance..you can do both.. however all on the mortgage means if you need to draw upon it through a change in circumstance you still have to get the bank consent..not a full bank application however they have the power...

by midgetkiwi | 12th Oct 17, 11:15pm 1507803338

you realise there is no difference eh Carlos? if you pay $50 more a week and your mortgage gets paid off a year early say, in an offset scenario you put aside the $50 a week, which doesn't get charged interest and you pay off a lumpsum a year early. It's exactly the same, if you have the self-control.

by John Smith | 13th Oct 17, 5:06pm 1507867572

If you have the self-control is the kicker here. While it is nicer to have the $50 in the bank for a 'rainy' day. Sometimes those rainy days are holidays or new TV's or whatever else you can justify because the money is easier to access.

by speckles | 12th Oct 17, 5:13pm 1507781632

We have our offset loan from when BNZ introduced them, first BNZ and now westpac -down to 120k with matching cash offset, applying P & I. The cash is part of our options fund...partly emergency fund (6mth) however also there if we seize on a business opportunity. OBI always on my mind however you do need liquid cash for options if they present themselves quickly ..shares etc. are usually on a low point if you need a deposit fast etc.

For us it has worked well and forced us to save enough cash to have the entire amount covered given we otherwise are paying the higher float rate than fixed.

Been also handy as self employed so do have cash variability over a year..

by EkeMadness | 13th Oct 17, 3:49pm 1507862988

We have an offset home loan utilising the parents money which remains in their names. Did this for our first house and subsequently our current house. We have our loan on interest only and pay off lump sums when cash builds up. To ensure that the parents are not disadvantaged we pay them "interest" based off a 1 yr TD rate less tax. As we pay more off they have to shift money which means we also pay them less interest. They get the good feelings of being able to help us without actually having to give us the money and they still get a return.