An offset family mortgage can act like a rainbow providing financial support from one family member to another. Photo / 123RF
Q: I don’t think I’ve read anything in your column about offset mortgages, but there have been a number of questions about helping children/parents into homes,to increase etc.
Our daughter in Christchurch needs a new bathroom and kitchen, which requires her to increase her mortgage. We have opened a savings account with our local branch of her bank and will be depositing an amount into that account, which remains our account in our name. We do not get any interest on those funds.
Her branch then links her account to our offset account, and she pays no interest on the amount that we hold in our offset account.
We lose 2 to 3% interest before tax, and she avoids paying, say, 5% on that amount. We can add to or draw from our account as we wish, and her interest is adjusted accordingly. She has described it as a magic rainbow connecting our two accounts.
I hope this might be of interest to your readers.
A: You’re right – this is a great way family members can help one another – whether it be parents helping adult children or the reverse. Other relatives can also participate.
Most banks offer some type of mortgage in which you can subtract your own savings from your mortgage balance. For example, if you have a $500,000 mortgage and a savings account with a $20,000 balance, you earn no interest on the savings, but you pay mortgage interest on “just” $480,000.
Or you can do much the same thing but in one revolving credit mortgage account, in which the balance on your everyday money – perhaps salary going in minus utilities and other bills going out – is subtracted from your mortgage balance daily. This can work really well for people who receive income in large chunks.
But you’re talking about a facility that also subtracts the balances in selected family members’ accounts. It all helps. And as you say, family can do this at relatively small cost to them, by the time you take into account:
We should note that all of the mortgages described above come only at a floating mortgage rate, which is usually higher than a fixed rate. So it works best for the borrower to split their loan, with a portion – in many cases the majority – of the loan at a lower fixed rate.
Family offset mortgages are offered only by BNZ, Kiwibank and Westpac, says Bruce Patten, a mortgage adviser at Loan Market.
“One thing most people don’t realise is that you still make payments on the full amount of the loan,” he says.
“For example: if the payments on a $100,000 loan are $600 a month, then even if you have $100,000 sitting in your offset savings account the repayments will still be $600 a month. You just won’t be paying any interest, so the loan will be reduced by that $600 every month.”
That means you will repay the loan sooner – a big plus.
Patten adds, “There are some cool calculators on the bank websites you can use to show how much sooner. If a loan is fully offset, say $100,000 loan and $100,000 in savings, then it will be paid off in around 14 years instead of 30.”
He says there are no real drawbacks, “but like any loan, you should review your structure on a regular basis to ensure it’s still working for you”.
“In the above example, your debt will have reduced by around $8000 in the first year. So then you would want to take some of your offset money out and put it into a regular savings account to earn some interest.”
Or you could move more of the total mortgage into the offset portion, bringing it back up to $100,000.
Footnote 1: Your main bank doesn’t have to be BNZ, Kiwibank or Westpac for you to open an offset savings account with your relative’s mortgage lender.
Footnote 2: This is a safer way to help a family member than guaranteeing their mortgage. While guarantees can work well, sometimes things fall apart when the borrower loses their job or gets into other financial difficulties and can’t make repayments, or when a borrowing couple separate. The guarantor might have to take on the loan.
With an offset mortgage, your money is still yours, and you can add to it or withdraw it as you please.
Footnote 3: At the risk of sounding mean, can I challenge the idea that someone needs a new kitchen or bathroom? While occasionally that’s true, usually it’s more of a want than a need. What your daughter is doing is great if she can afford it, with your help. I just hate seeing people getting into financial strife over dated cupboards.
Q: My wife and I are 67 and 65, respectively, and are both retired. We have a dependent son (he is severely handicapped, aged 35), whose welfare and upkeep are quite expensive.
We own our own modest home and have a fixed-interest portfolio to last us (hopefully) until into our late seventies. We also have money in a highly reputable NZ funds management company.
Most of their share fund (and most others in New Zealand) is invested in US shares (which make up almost 75% of global stock markets by capitalisation). It is no secret that the US stock market is currently valued extremely richly on a historical basis.
Consequently, we are (reluctantly) heavily invested in their cash fund, in anticipation of a significant market correction (which seems inevitable going forward), to then invest in their growth fund after that.
We do not expect to have to draw upon these funds (being our last source of money) for about 10 years, and are cognisant of the imperative to receive compound annualised growth ahead, to preserve our spending power.
However, the dilemma we face is that if we invest in the growth fund now, we risk having to weather a significant (even major) capital drawdown before the opportunity for capital growth to occur once again.
So we are somewhat uneasily sitting on the sidelines. We are quite conservative people and would value any thoughts you have on this predicament.
A: You’re a bit like last week’s correspondent, who hopes to move money from an aggressive fund to a cash fund right before a downturn. As I said to him, it doesn’t work to try to time markets.
Maybe the US share market will fall soon, but maybe it won’t. One good way to reduce that risk would be to move into a share fund with lots invested outside the US. That will give you considerable diversification. Not all countries perform the same way.
But as far as moving to a cash fund, and later back to a share fund, is concerned, research shows that investors who do that almost always end up with considerably less over the years than those who just stay put.
For your strategy to work, you have to:
I suggest you either decide you’re in for the long haul and move the money back into an international share fund and leave it there, or acknowledge you’re uncomfortable doing that and move your long-term money into, say, a balanced fund, where the rises and falls will both be smaller.
Q: Your comments last week regarding the value of private health care insurance are relevant, but I feel they miss one point. Aotearoa New Zealand does have a public health care system that is much lower-cost than the private system. It is not the end of good health care using the public system.
As you point out, health insurance costs climb significantly as you age and can be hard to justify if the household is no longer earning more than superannuation. We discovered this and will rely on the public system as we age, using the private system sparingly if necessary.
There are ways to navigate through the public system if hospital treatment is required. Seeking early assessment, starting with your GP when niggles begin, can lead to a referral that may have a long wait time. Paying for the first basic scan or test to go with a referral can help define the problem. Confirm the referral is sent, received, and assigned. And clearly document your personal record to fully explain the issue.
We all need to remember that a large majority of people are treated efficiently and well in the public system, despite the media horror stories.
A: You make a good point, that for those without health insurance it’s a good idea to pay for early assessment, so you know where you stand. And documenting what’s going on is wise.
Yes, the public system can work well for many people. It’s a case of weighing up the risks and the costs.
The next reader thinks along similar lines to you.
Q: I’m a medical specialist, and I think your assessment last week that older people need hundreds of thousands of dollars to self-insure is excessive.
The threshold for surgery for non-life-threatening conditions will be higher for those unable to afford private care, but the threshold for undergoing such surgery actually should be high for elderly people. People often underestimate the risks associated with undergoing major surgery as they age.
When surgical care is required, very elderly or unwell people are often better off receiving care in the public system, which provides better perioperative support. Some older, sicker people may even find that they are no longer able to access care at a private hospital, even though they can afford it.
My parents have recently faced the insurance dilemma. I suggested that if they could self-insure enough to cover expedited specialist appointments, scans and screening tests, AND they would have a very high threshold for wanting an operation, then it seemed reasonable to let the insurance go.
That sort of self-insurance fund probably only needs to be around $30,000. If you know you are likely to need non-lifesaving surgery (eg a joint replacement), and don’t want to wait until you meet public wait-list criteria, then probably better to keep the insurance.
I worry about my parents getting a delayed diagnosis because of a long wait to see a specialist or receive a scan or scope. But I don’t worry about them receiving high-quality care if they get a cancer diagnosis requiring surgery. I am also confident that any accidents or acute surgical problems would be treated well in the public system. And that is also where I feel they would receive the best care.
A: You also make some good points. And it’s interesting to know that sometimes older people might be better off without some types of surgery – although I would like to think they would be told that regardless of whether they have health insurance.
On the quality of public health care, I bow to your superior knowledge. It’s good to learn of your high regard for the system.
I agree that it seems the public system usually performs well for cancer patients. But you acknowledge the long waits for joint replacements. And I’m not sure whether people in their sixties are good judges of whether they will later need that surgery. Knees and hips can cause trouble out of the blue.
Lots of readers wrote about last week’s health insurance Q&As. More views on this next week.
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* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.