Offsetting mortgages can reduce the amount of interest you pay1. They do this by letting you subtract, or offset, for the purposes of calculating interest, your cheque and savings account balances from the amount you still owe on your loan.
This type of mortgage has a floating (or variable) interest rate. Some people will mix and match by having some of their loan on a fixed interest rate and some on an offsetting home loan.
Here’s how it works
The total amount in your cheque and savings accounts is subtracted off your mortgage before the interest is calculated, which means you only pay interest on the difference.
For example, if you have a variable interest rate home loan of $100,000 and you offset $20,000 of it using your cheque and saving balances, you’ll only pay interest on $80,000 of your mortgage.
For and against
For: If you regularly have money in transaction or savings account you can save on interest and pay off your home loan faster and if you are fully offset you can pay no interest.
Against: As the rate is floating it can go higher than fixed term rates and if the interest rate goes up, so will your repayments which could put a squeeze on your budget. Also, if you offset you don't earn credit interest on your savings.
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