How an offset account works
An offset account is a normal bank account linked to your mortgage. Instead of earning interest on its balance like a savings account, the balance is offset against the loan before interest is calculated. If you owe $400,000 and keep $40,000 in the offset, interest is calculated on $360,000, the difference. Your payoff gets shorter and you keep the $40,000 available as cash.
The insight that makes offsets attractive: mortgage interest is generally much higher than what a savings account pays, so parking money in the offset "earns" you the mortgage rate, tax-free, on that balance. It is the closest a bank product gets to a liquid, no-risk return at your mortgage rate.
An offset only helps while the money stays there. If the balance drifts to near zero because you dip into it, you get little out of it. Forcing yourself to empty the offset to buy things defeats the whole mechanism.
How extra repayments differ
An extra repayment is money you pay onto the loan beyond the minimum, which reduces the principal outright. Once made, that money is gone from your pocket and, on a standard fixed loan, it is usually locked away. You cannot simply draw it back. With a redraw facility, some banks will let you redraw the extra you paid, effectively making it semi-liquid again.
The trade-off versus an offset:
- Extra repayments shrink the debt, cost nothing in fees on most loans, and are often capped each year on fixed rates (commonly somewhere around 5% of the loan per year without penalty).
- Offset accounts keep your money flexible, especially useful for an emergency fund, but some lenders charge a monthly fee, and they are typically available on floating, variable or revolving portions rather than every fixed rate.
Because both reduce the balance that interest is charged on by the same dollar amount, at the same rate the interest saving is essentially equal. The real differences are fees, access, and cap limits, not the interest maths.
Revolving credit and floating
Many NZ packages use a revolving credit line: an offset-like facility where your credit card and mortgage share a fluctuating balance and the interest is charged on the amount you actually owe. Parking income in the account temporarily reduces the balance, just like an offset. It is powerful for people whose income arrives in a lump (like contractors) and ineffective if the balance is usually high.
A common structure is to fix part of the loan for certainty and keep a portion floating with an offset or revolving facility, so you get a stable rate on some of the debt and flexibility on the rest. The mix is a personal call about how much rate certainty you want, not purely an interest-optimisation decision.
If you are disciplined and have a real buffer, an offset (or revolving credit) on a floating portion is often the flexible winner. If you want the loan gone and can handle the money being locked away, extra repayments are usually the cheapest, fee-free route.
When the fee is the whole question
None of this matters unless the benefit beats what you pay. Add up the offset's monthly fee over a year and compare it with the interest you would save by holding your buffer in the offset instead of a savings account. On a big loan with a healthy balance, the offset almost always wins. On a small loan being paid down fast, a fee can quietly eat the advantage. Run the numbers before you treat a package as free.