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Interest Offset Mortgage

Definition: An Interest Offset Mortgage allows borrowers to reduce their mortgage interest by linking their mortgage to a chequing or savings account. The balance in this account offsets the mortgage balance, lowering the interest payable.

Key Features:

  • Interest offset mechanism: The lender calculates interest based on the mortgage balance minus the amount in the linked account. This reduces the total interest charged, especially beneficial for borrowers with substantial savings.
  • Flexible access to funds: Unlike making lump-sum prepayments, borrowers can access their funds anytime without affecting the mortgage principal, providing financial flexibility.
  • Potential savings: Interest offset mortgages can significantly reduce the total interest paid over time, particularly when account balances are maintained at a high level.

Example:

If a borrower has a mortgage balance of $400,000 and maintains $50,000 in the linked offset account, interest is calculated on $350,000, reducing the monthly interest expense.

This type of mortgage appeals to borrowers who wish to save on interest without committing to regular prepayments on the principal. It’s a strategic choice for individuals who maintain substantial, accessible savings.

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Last modified: November 5, 2024

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