Are you looking for ways to pay off your home loan faster or reduce the interest you pay over time? Many homeowners ask us about two clever mortgage features that can help achieve these goals: offset loans and revolving credit facilities. Both options can save you money by minimising interest, but they work in different ways. In this guide, we’ll break down how each one works, their pros and cons, and when one might be better than the other for your situation. By understanding the differences, you can make an informed decision on the best strategy to accelerate your home ownership journey.
What Is an Offset Loan and How Does It Work?
An offset loan (or offset mortgage) is a type of home loan that lets you use the balances in your savings or everyday bank accounts to reduce (“offset”) the amount of interest you’re charged on your mortgage. Essentially, the money in your linked accounts is subtracted from your loan balance when interest is calculated. For example, if you have a $500,000 mortgage and $50,000 across your savings and checking accounts, you’ll only pay interest on $450,000. Your savings stay separate but linked to the loan. You can still use those funds whenever you need, but while they sit in the bank, they’re working to cut down your interest costs. Offset loans in New Zealand are typically on a floating interest rate, meaning the rate can move up or down, and currently only some banks (like Westpac, Kiwibank, and BNZ) offer this feature.
How an Offset Loan Saves You Money
Because interest is only charged on the net balance of your mortgage, any money you keep in your offset accounts is essentially earning you the equivalent of your mortgage interest rate. This can be far more beneficial than keeping that money in a normal savings account where interest earned is much lower (and taxable). For first-time home buyers encountering this concept, imagine it as your savings silently chipping away at your interest every day. You don’t pay tax on the interest you save, and you can potentially become mortgage-free sooner without making extra loan repayments. Your regular income sitting in the bank does part of the work for you.
Pros of Offset Loans
- Significant Interest Savings: Every dollar in your linked offset accounts reduces the amount of interest you’re paying on your home loan. Over the life of the loan, this can add up to thousands saved and potentially cut years off your mortgage. You’re making your money work harder, especially in a higher interest rate environment where each dollar has a bigger impact.
- Multiple Accounts & Flexibility: Offset loans usually allow you to link multiple accounts (savings, everyday transaction accounts, etc.) to one or more mortgages. This flexibility is great for households that like to keep money in separate accounts for different purposes. For instance, you might have an emergency fund, a renovation savings account, and your everyday account all offsetting your mortgage balance at once. You maintain control and visibility of your money in separate pots, while collectively they reduce your loan interest.
- Easy Access to Funds: Money in an offset account remains fully accessible. There’s no complicated process to withdraw it. This makes an offset ideal if you want to build savings for a future goal, like when you plan to invest in a rental property, while still cutting down interest on your current home loan. You get the best of both worlds: liquidity and interest reduction.
- No Change to Loan Structure: Using an offset doesn’t require you to continually redraw or re-borrow money. Your loan balance remains separate from your savings. This can make it simpler to track your progress. Your mortgage statements show the full loan, but interest charged is less if offsets are in place. It’s a “set and forget” way to save interest, as long as you keep funds in your accounts.
Cons of Offset Loans
- Limited Availability: Not every lender in NZ offers offset facilities. If your mortgage is with a bank that doesn’t provide offset loans, you might have to refinance your mortgage to a new lender to take advantage of this feature. The big players like BNZ, Westpac, and Kiwibank support offsets, but others may not. This limitation can restrict your choices of lender or require extra effort to switch banks.
- Floating Rates Only: Offset accounts are generally only available on floating (variable) rate loans, not fixed rates. Floating rates can be higher than the best fixed rates and are subject to change with the market. In 2025, floating interest rates are on the higher side, so you’ll need to ensure that the interest savings from your offset balance outweigh the potential extra cost of a floating rate. If you prefer the certainty of a fixed rate, an offset might not be compatible with that portion of your loan.
- No Interest Earned on Savings: While your savings offset the mortgage (saving you interest), keep in mind you’re not earning interest on those funds at the same time. For most people this trade-off is positive (since mortgage rates are higher than deposit rates), but if that changes, the benefit of offsetting could diminish. Essentially, your savings return is the interest saved on the loan, which is usually great, but there’s no separate income from those savings.
- Requires Good Financial Habits: To maximise an offset loan’s benefit, you need to consistently keep money in your accounts. If you tend to spend every dollar or have trouble maintaining a savings balance, an offset won’t help much. For example, if you withdraw your entire offset savings for a splurge, your mortgage is no longer offset and you’ll pay full interest that period. It still offers more flexibility, but to see real savings you must be disciplined in keeping funds in your accounts whenever possible.
What Is a Revolving Credit Facility and How Does It Work?
A revolving credit facility is another powerful tool to help pay off your home loan faster. It’s essentially a giant overdraft on your mortgage account: a line of credit with a set limit (often a portion of your overall loan) that you can draw from or deposit into at any time. With revolving credit, your everyday transaction account is your loan for that portion of borrowing. All your income (salary, rent, etc.) can be paid into this account, immediately reducing the balance on which interest is calculated. Then, as you pay your bills or withdraw money for expenses, the balance goes up and you’re charged interest on that higher amount again. Interest is usually charged at a floating rate and calculated daily on the outstanding balance, just like a normal overdraft or credit card, but at mortgage interest rates which are much lower than credit card rates.
Revolving credit is highly flexible and can be a great fit for those who are financially disciplined and/or have irregular income. For instance, self-employed borrowers or contractors with uneven cash flow often use revolving credit to park large sums when business income comes in, then draw it down during leaner months. This way, they minimise interest during good months without losing access to funds when needed. It’s also handy as you have credit available up to the limit without applying for a new loan each time. However, with great flexibility comes responsibility to use it wisely.
Pros of Revolving Credit
- Ultimate Flexibility in Payments: A revolving credit facility lets you pay extra into your loan anytime and withdraw money whenever needed. There are no fixed repayment schedules for the principal. You’re only required to pay the interest due each month. This means if you come into some extra money, you can dump it straight into the loan and immediately cut down your interest, then redraw it later if life throws a curveball. Over time, this flexibility can help you massively reduce the principal faster than a standard loan, especially if you regularly pay in more than you spend.
- Easy Access to Funds: With a revolving credit, your loan account doubles as your daily banking account. You can use EFTPOS, automatic payments, or online transfers from it just like a normal account up to your credit limit. Need to pay for a home repair or a last-minute expense? You can simply withdraw or transfer from your revolving credit without any separate loan application. It provides peace of mind that you have a cash buffer for emergencies or opportunities. Many clients like knowing they have, say, a $20,000 credit line available if the unexpected happens, all while that credit line costs nothing unless used, and actually saves them interest when filled with their deposits.
- Consolidation of Income and Expenses: Because all your earnings and outgoings flow through one account, every dollar works to reduce interest for at least part of the time. This all-in-one approach means you don’t have idle cash sitting in chequing accounts earning nothing. It’s always offsetting your loan until you spend it. For the right person, this can simplify money management and ensure you’re getting the maximum benefit from every dollar of income. There’s no need to juggle multiple accounts to optimise interest savings as you would with an offset; just by living your normal life and keeping your money in the revolving account as long as possible, you’re shaving down interest.
- Widely Available & Customisable: Practically every major lender in New Zealand offers revolving credit facilities (sometimes under different names like “floating flexi loan” etc.), and they typically allow you to choose an appropriate credit limit. Commonly, people might have a revolving credit limit equal to their expected surplus cash or savings (for example, 10-20% of the loan). You can often adjust this limit if your circumstances change. Since it’s a standard offering, you can likely set up a revolving portion with your current bank as part of a mortgage restructure or refix. It’s a very user-friendly tool when set up correctly alongside your other loan portions.
Cons of Revolving Credit
- Requires Strong Discipline: The biggest downside to revolving credit is the temptation that comes with easy access to funds. Because your loan account looks like a normal bank account with a large available balance, it can be all too easy to dip into what is effectively borrowed money for non-essentials. If you lack budgeting discipline, you might find that instead of reducing the loan balance over time, you’re constantly using up the available credit. We only recommend this facility if you’re confident you can manage your spending and not treat the credit limit as extra income.
- No Separation of Savings Goals: Unlike an offset loan where you might keep different savings buckets, a revolving credit lumps everything together. This can make it harder to mentally separate money that’s earmarked for specific goals. For example, if the money for your upcoming holiday, home improvements, and emergency fund is all just “available credit” in one account, you’ll need to be very organised to avoid accidentally overspending. Some people simply prefer the clarity of having separate accounts, in which case an offset structure might suit better.
- Interest Rate and Limit Considerations: Revolving credit facilities are on floating interest rates, which may be higher than some fixed loan deals. You’ll want to limit how much of your mortgage is on revolving credit to an amount you can realistically keep down with your income. Banks also typically cap the size of a revolving facility. This isn’t an issue for most, but it means you might not be able to put your entire loan on revolving credit even if you wanted to. Additionally, if interest rates rise, the cost of the outstanding balance will rise as well.
- Can Be Overwhelming for Some: Managing a revolving credit effectively means staying on top of your day-to-day transactions and monitoring that balance. For some homeowners, especially those not inclined to track finances closely, this can feel overwhelming.
- If you prefer a set-and-forget budget or get anxious when your account swings between positive and negative balances, a revolving credit card might cause stress.
- Lenders often charge Monthly Fees for each revolving credit account. Some lenders charge zero fees for several revolving credit accounts.
Offset or Revolving Credit: Which One Should You Choose?
Both offset loans and revolving credit can save you a lot in interest and help you become mortgage-free faster, but the best choice depends on your financial habits, goals, and what your lender offers. Here are a few guidelines to consider when deciding between the two:
- Choose an Offset Loan if you have substantial savings or keep higher balances in your accounts, and you like the idea of keeping those funds separate from your loan. Offsets are fantastic for families or individuals who are good at accumulating savings and want that money to work against the mortgage without giving up access. They’re also often preferred by property investors. If you’re cautious about overspending and appreciate a clear divide between savings and debt, an offset provides that structure. Just remember, you’ll need to be with a bank that has an offset option, and you’ll likely be on a floating rate. Many investors and financially savvy borrowers gravitate toward offsets for the flexibility and control they offer in managing multiple accounts and loans.
- Choose a Revolving Credit if you value maximum flexibility and have the discipline to manage it. Revolving credit can be ideal for those with variable incomes, commission-based jobs, or self-employed businesses where cash flow isn’t consistent month to month. It acts as a buffer, smoothing out the highs and lows of your finances. If you’re confident you won’t treat the available credit as a shopping spree, a revolving facility lets you throw every spare dollar at your loan and pull it back out when needed. It can simplify your banking and works well if you prefer to manage your money actively.
- Why Not Both? In practice, many homeowners use a combination of loan types. You might put a portion of your mortgage into a revolving credit and keep the rest in a standard fixed or floating loan. If your bank offers it, you could even have an offset account linked to another portion. The key is finding the mix that suits your lifestyle. For example, you could have a small revolving credit for emergency funds and short-term cash flow, and also maintain an offset on a chunk of loan because you have some longer-term savings sitting around. There’s no one-size-fits-all answer. This is something I specialise in when advising clients: ensuring your loan structure matches your needs and maximises your savings.
Still unsure which option fits your situation? It can be hard to navigate these choices on your own, but you don’t have to. Feel free to contact me for a friendly chat about your mortgage structure. As an experienced mortgage broker in North Shore, Auckland, I can help you weigh up the pros and cons in the context of your personal finances and even set up a mix of solutions that ticks all the boxes. The goal is to help you save money and become mortgage-free faster, using the strategy that makes the most sense for your circumstances. Remember, the right advice and structure today can save you a fortune tomorrow! Let’s figure out the best way to make your money work harder for you.