Offset Mortgage

What is 'Offset Mortgage'

An offset mortgage is a type of mortgage that involves blending a traditional mortgage with one or more deposit accounts; the savings balance(s) held in the latter can be used to offset the mortgage balance. Both the account and the loan are held at the same banking institution, and an initial loan balance (or credit limit) is established, along with an interest rate. The savings account is typically a non-interest bearing account, allowing the bank to earn a positive return on any balances in the account. 

When each mortgage payment is made, the interest is calculated on the principal remaining in the mortgage account, minus the aggregate amount of savings in the one or more deposit accounts. Borrowers still have access to their savings; if money is removed from savings during the month, the next mortgage payment will be calculated on a higher principal balance. More than one savings account can be linked to the mortgage account, and family members of the borrower can link their savings accounts to the mortgage account to reduce the amount of the principal the interest is charged on.

For example, if the mortgage principal is $225,000 and $15,000 was held in savings during the last month, the interest due would only be calculated on ($225 – $15) = $210,000.

BREAKING DOWN 'Offset Mortgage'

An offset mortgage is a very attractive option for people who are diligent savers - even though the savings account won't earn any interest, these accounts are typically low-earning accounts that only pay 1-3 percent per year. It is likely that the interest rate on the mortgage is substantially higher than the interest on the savings account, so any savings there are a net benefit to the borrower. The foregone interest on the savings account becomes non-taxable payments towards the mortgage. 

Offset mortgages are common in many foreign nations, such as the U.K., but are currently not eligible for use in the U.S. because of tax laws.

Benefits of an Offset Mortgage

An offset mortgage is an attractive option for paying back a mortgage loan primarily because the borrower can make small payments to pay down the principal instead of the interest, which reduces the amount of the loan more rapidly. But because these payments are to the borrower’s own savings account, the borrower still has the use of their own money if they need it, and does not have to invest it fully in the mortgage payment. This gives the borrower all the benefits of paying back the mortgage quickly, but also all the benefits of saving money in an investment account.

By keeping the monthly mortgage payment the same, a borrower will pay down the actual principal of the mortgage more rapidly, as the part of the monthly payment that goes to the interest will be smaller, since the remainder will go to the principal.