Is an offset account better than savings?

Usually yes. Money in an offset reduces your mortgage interest at your full mortgage rate, and that saving is not taxed. Savings interest is taxed, so the after-tax return is often lower than the offset benefit.

Why is offsetting tax-free?

Offsetting reduces interest you would have paid, rather than earning income, so there is no tax on it. Savings interest is income and has resident withholding tax deducted.

How much does offsetting save?

Roughly your offset balance times your mortgage rate. The calculator compares that against the after-tax interest the same money would earn in savings.

Offset vs Savings Calculator

This New Zealand calculator compares keeping money in an offset account against an ordinary savings account, showing why offsetting your mortgage usually beats earning taxable interest. You enter your savings, mortgage rate and savings rate, and it shows the effective after-tax benefit of each, helping you put your spare cash where it works hardest.

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Spare cash

Mortgage rate

Savings rate

Tax rate on savings

where your spare cash works hardest (per year)

Offset benefit (tax-free)$0

Savings interest (after tax)$0

Offset advantage$0

Offsetting reduces mortgage interest at your full rate, with no tax. Savings interest is taxed via resident withholding tax, so its after-tax return is lower. An offset facility may have conditions or a higher loan rate, so check the full package. Estimate only, not financial advice.

How it works

The offset benefit is your spare cash times your mortgage rate, because every dollar offset saves that much interest, and saved interest is not taxed. The savings benefit is your spare cash times the savings rate, reduced by tax at your rate, because interest is taxable income. Comparing the two shows the offset usually wins, since it saves at the higher mortgage rate and is tax-free.

Worked example

$40,000 against a 6.5% mortgage saves $2,600 of interest, tax-free. The same $40,000 in savings at 4.5% earns $1,800, but after 33% tax that is about $1,206. The offset is roughly $1,394 a year better, which is why spare cash often does best against the mortgage.

Related calculators

Mortgage Offset Calculator: offset in detail.
Revolving Credit Calculator: revolving credit savings.
RWT Calculator: tax on interest.
Mortgage vs Invest Calculator: pay down or invest.

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