Offset mortgages: how linked cash reduces interest
An offset mortgage keeps linked cash available while reducing the loan balance on which interest is charged; account rules and variable rates still matter.
On this page
- Mechanism
- Linked cash reduces the interest-bearing loan balanceBNZ, TotalMoney home loans
- Linked account interest
- Offset accounts do not earn interestSorted, mortgage types
- Rate structure
- VariableKiwibank, offset home loan
- Product scope
- Eligible accounts depend on the lenderKiwibank, offset home loan
The cash offsets interest, rather than repaying principal
BNZ describes subtracting the total balance in connected transaction accounts from the home loan balance before calculating interest. The scheduled repayment does not change, so less interest means more of that payment reduces principal. Connected accounts remain transaction accounts with money available to deposit or withdraw. BNZ, TotalMoney home loans (opens in a new tab).
Account eligibility differs between lenders
Kiwibank describes linked everyday accounts reducing the amount of interest payable on its offset loan. Its offset rate is variable and interest is calculated daily. New offset loans can link eligible Free Up or Now accounts; term deposits, KiwiSaver and non-Kiwibank accounts cannot be newly linked. This is a description of the mechanism, not a product comparison or recommendation. Kiwibank, offset home loan (opens in a new tab).
Linked cash has a trade-off
Sorted explains that linked savings accounts do not earn interest while offsetting a loan. The benefit is reduced mortgage interest rather than interest paid into the linked account. Changing the linked cash balance changes the interest-bearing balance, so cash spent from an account no longer offsets that part of the loan. Sorted, mortgage types (opens in a new tab).
The calculator is a bounded scenario
The calculator holds the entered interest rate constant and models interest monthly, whereas the cited bank products calculate interest daily and their floating or variable rates can change. It assumes the offset balance is not spent, scheduled repayments stay the same and entered monthly additions continue. It excludes fees, facility charges, redraws and extra repayments, and does not model interest earned on linked cash. Results are estimates rather than a bank repayment schedule. Money Financial, offset calculator methodology (opens in a new tab).
Access to linked money continues
Kiwibank distinguishes money held in linked everyday accounts from an extra payment into the loan itself. Linked account money remains available for use, and when that money is spent the interest-bearing difference increases. Extra loan repayments are different: its page states that money paid into the offset loan cannot then be redrawn or transferred out. These are separate movements with different access consequences. Kiwibank, offset home loan (opens in a new tab).