BNZ has “Total Money”. Kiwi Bank, the “Offset Mortgage”, they even talk about the effective Interest rate savings in their marketing! Gee who’s been reading our blog… we’ll take your thank you as unspoken! Westpac, have just released and so have ASB too.
So what is an offset Mortgage and how does it work? You can look at all the hype but basically it calculates the balances of your additional accounts against your principle balance. Offset mortgages are primarily aimed at the customer keeping external savings and cheque accounts, but NOT on term deposit. Its complicated because you are not actually paying anything down.
The interest is calculated as if it offset the principle balance of your loan; however the principle balance of your mortgage is still “external” and is still kept separate from your “external savings”. IE it DOESNT actually reduce your principle amount you owe… Just offsets… so what interest you would have paid if you actually did pay down the principle amount is what you get charged…NOW THAT’S MARKETING!
Also the banks are promoting large amounts of additional accounts. Why? There marketing team will tell you so you can control your money by seeing separate balances everywhere (especially BNZ and Kiwi) however this process and product in reality doesn’t change ANYTHING about how you are fundamentally treating your money, so in the long term for the vast majority of clients will produce no different result.
Why they won’t work.
For any financial plan to be successful you have to have well… a financial plan! And Offset mortgages do nothing towards addressing this issue.
Assuming you do the planning yourself, then it will work right? Well no… (sorry)… offset is just like interest rate, it deals in the “now”, and doesn’t address the tomorrow, in other words how do you actually know where your finances are in the long term, and do you know when you will be actually debt free?… NO!… Remember offset is not actually paying down your principle amount.
How do you Change your plan when something changes? This is further compounded and made WORSE if you can then offset other people’s money against your debt! (Like Kiwi banks product) sure you might save in the short term but what about when your family member needs their money back? Offset fails miserably to return anything other than some small interest savings over the very short term to the majority. Any product is only ever a very small part of a successful plan, and its not what product you have but rather how you use it.
Where’s the support? In short there is none. Offset in principle is a great idea, but in reality is complicated (deliberately) and provides no guidance, advice or support. It is the newest shiny product and also carries some serious fee structures (depending on which bank). They are not designed to reduce what you owe, just offset the interest you are paying today… Short term gain, long term pain.
To get ahead requires guidance and professional qualified advice. Otherwise you’ve just brought the new 2 seater convertible as a family car.
Paul Newton is a consultant with New Zealand Home Loans and a director of Newton Financial Solutions Limited and New Zealand Home loans Specialist Limited TA New Zealand Home loans Christchurch Central. Paul can be contacted on Paul.firstname.lastname@example.org . This article is expresses a personal opinion only and should be taken as such. I accept no liability for errors of fact or of opinion herein. No Liability will be accepted by New Zealand Home Loans or any of its product suppliers for errors omissions or opinions expressed by Paul Newton in this electronic capacity. FULL disclosure and disclaimer documents are available on request.