Calculate mortgage interest savings, payoff time and monthly payment with an offset balance, or compare two offset amounts over time.
Offset Mortgage Formula
The following equation is used to calculate the Offset Mortgage.
- Where OMB is the offset mortgage balance ($)
- MB is the total mortgage balance ($)
- SB is the sum of linked savings/current account balances ($)
To estimate the effective balance for interest, subtract the linked offset balance from the current outstanding mortgage balance, with a minimum of zero. This does not repay principal. The calculator uses constant offsets and monthly interest; actual lender accrual and fees may differ.
What is an Offset Mortgage?
Definition:
An offset mortgage is a type of home loan that links the borrower’s savings and transactional accounts to the mortgage. Balances in these linked accounts reduce the effective balance on which interest is charged without reducing the outstanding principal itself, potentially shortening the loan term and decreasing total interest paid over the life of the loan.
How to Calculate Offset Mortgage?
Example Problem:
The following example outlines the steps and information needed to calculate the Offset Mortgage.
First, determine the total mortgage balance. In this example, a borrower has a mortgage with an outstanding balance of $300,000.
Next, determine the total sum of all linked savings and current accounts. Suppose this amount is $50,000.
Finally, calculate the offset mortgage balance using the formula above:
OMB = MB – SB
OMB = $300,000 – $50,000
OMB = $250,000
FAQ
How does an offset mortgage save me money?
When you link your mortgage to your savings, any amounts held in those accounts reduce the effective balance on which interest is charged, potentially lowering your monthly interest costs and helping you pay off the mortgage sooner.
Is an offset mortgage suitable for everyone?
Offset mortgages may be most beneficial for borrowers who maintain significant savings or current account balances. Individuals with modest or fluctuating savings might not see as much advantage, so it’s important to assess personal financial circumstances.
What happens to my savings in an offset account?
Your savings remain accessible as normal, but they simultaneously work to offset your mortgage balance. You’re not typically earning direct savings interest; instead, you’re effectively reducing your interest payments on the mortgage.
