Offset Mortgages: How They Work and Who They Suit

How does an offset mortgage work?

Your borrowing and your day-to-day banking sit together. When your pay or savings land in the account, they reduce the balance that interest is charged on, and interest is calculated daily. If you owe $400,000 and have $30,000 sitting in the account, you pay interest on $370,000.

The money is still yours. You can take it back out when you need it, which is the difference between an offset and a lump-sum prepayment on a regular mortgage.

In Canada this is usually built from two parts: a line of credit portion, which federal rules cap at 65% of the home's value, and one or more fixed-rate portions that can bring total borrowing up to 80%.

Why can an offset mortgage beat a lower-rate mortgage?

Because of how your money moves through it. In a regular set-up, your pay sits in a chequing account earning nothing until you spend it. In an offset, every dollar reduces your interest from the day it arrives until the day it leaves.

That only works in your favour if more comes in each month than goes out. With a steady surplus, the savings can outweigh a higher rate. Without one, they will not.

Who does an offset mortgage suit?

• Households that reliably spend less than they earn each month
• Business owners, professionals and commission earners whose income arrives unevenly
• People who keep sizeable cash reserves and want them working
• People who value being able to get at their money without refinancing

Who is it not a fit for?

• Households that spend most of what they earn
• Anyone who wants the certainty of one fixed payment and a balance that only goes down
• Anyone who would be tempted by having credit always available
• Homeowners with less than 20% equity

What are the costs and trade-offs?

• A higher rate. The rate is usually above a standard mortgage rate.
• A monthly account fee.
• A variable rate on the open portion. Your cost moves when rates move.
• It depends on your habits. The balance can go back up as easily as it comes down.

How do I find out whether it would work for me?

I model your own numbers: your mortgage as it is today, next to the same borrowing as an offset, with your real income and spending. You see the difference in interest and in years, and what happens if your surplus is smaller than you expect. If it does not come out ahead, I will tell you.

This page is general information and is not financial, legal or tax advice. Results depend on your own income, spending and rates. All mortgages are subject to lender approval.