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property investment
sandy richardson
THE
OFFSETTING
ADVANTAGE
Sandy Richardson looks into offset
home loans and how they might
work for you.
The Reserve Bank has once again left the
official cash rate unchanged with economists now
suggesting that floating remains a good choice for
borrowers. With just over 60% of New Zealand
home loans already on floating rates this will come
as good news.
Interest rates are but one aspect of a home loan,
and it’s worth remembering that the type of variable
rate loan you choose makes a difference. Common
options are standard variable home loans, revolving
credit loans or offset home loans.
I believe investors understand standard variable
home loans and the revolving credit facilities pretty
well. Offsetting, on the other hand is still somewhat
of an unknown.
With an offset loan you use the balances of your
transaction accounts (such as cheque, savings, rent
or maintenance) to reduce your home loan balance,
reducing the amount of interest you pay, and
therefore reducing your effective interest rate. An
offsetting facility is available with either principaland-interest or interest-only terms.
With principal and interest, your regular
payments remain the same, but by lowering the
effective interest rate you’ll repay more of your
original loan (the principal) each time. You could
take years off your home loan, saving thousands of
dollars in interest. This will appeal to investors who
have debt reduction as a focus and those trying to
minimise interest charges.
On an interest-only offset loan your regular
interest charges would differ depending on the
amount available for offsetting. This can help to
preserve income, reduce outgoing expenses and
therefore maximise your cashflow.
For example, if you have a loan of $200,000
and an account for each property with a balance of
$5,000 (which receives your rent and covers your
repairs and maintenance, insurances and rates),
your home loan interest would only be calculated
on the difference between the combined account
balances and your loan.
$
Without Offsetting
HOME
LENDING
Pay interest
on this much
Rent,
maintenance
and savings
$
With Offsetting
Only pay
interest on
this much
HOME
LENDING
Rent,
maintenance
and savings
Property investors are generally focused on yields
and cashflow therefore interest rates and fees play
a big part in their decision-making processes. With
an offset loan there will be an interest rate applied
like any other loan, but the key difference is that this
rate can be reduced through offsetting, creating a
lower effective rate.
Let’s have a look at how you calculate your home
loan’s effective interest rate.
Calculate the amount of interest paid annually
by multiplying your loan balance, less the credit
balances available to offset, by the interest rate,
divide this by the amount of the outstanding loan,
and then multiply this figure by 100 to get your
effective rate.
If we take the example above and you have a
home loan of $200,000.00 on an offset home loan
variable rate of 5.74%pa (current as at the day of
writing) and you have four accounts (one for each
of your investment properties) with combined
credit balances totalling $20,000.00, your monthly
interest charge would be $861.00 and your effective
rate would be 5.17%, much lower than other rates
available.
Current loan balance
$200,000
- credit balances
available for offset
$20,000
= $180,000
x current interest rate
5.74% p.a
= $10,332
÷ current loan balance
$200,000
= 0.05166
x 100 (to get percent)
AN OFFSET
HOME LOAN
CAN CREATE
A LOWER
EFFECTIVE
RATE
= 5.17% p.a
You will also shorten the term of your loan; in
this case by three years and six months.
Bank of New Zealand and Kiwibank are the only
two lenders in New Zealand currently offering offset
loans. There are some key differences, perhaps
most relevant to investors is that BNZ’s TotalMoney
is also available to family trusts and look-through
companies.
Sandy Richardson is
a Sales Manager at
Bank of New Zealand
and heads a team of
property managers
who specialise in
Residential Property
Investment. Visit bnz.
co.nz/rentalproperty or
phone 0800 269 009 to
find out more.
This article is
intended as a general
discussion only, and
is based on selective
information which
may not be suitable for
your purposes. BNZ
strongly recommends
the recipients take
independent legal,
investment and
financial advice
prior to making any
investment decisions.
The views expressed
are the writer’s own
and do not necessarily
represent those of BNZ
or its related entities.
www.propertyinvestor.co.nz // NZ property investor 59