Offset Mortgages

What are Offset Mortgages?

Offset mortgages are fairly new in the UK; the idea was launched in 1994 after they gained popularity in Australia. They’ve been becoming increasingly popular to homeowners in the UK. The key feature of an offset mortgage is the ability to reduce the interest charged by offsetting a credit balance (such as savings account and current account) against the mortgage debt. They can potentially shave years off a mortgage, consequently saving thousands of pounds that would have been paying off interest on a loan.

How do Offset Mortgages work?

Offset mortgages takes into consideration all your finances by pulling your mortgage debt, current account balance and savings account balance all into one single account. On a daily basis, your savings, plus the money in your current account are offset against your debts (mortgage and loans).

For example:
– you have a mortgage of £100,000
– you have £10,000 in your savings account
– you have £1,500 in your current account.

An offset mortgage will calculate how much you have in your current and savings account. £10,000 (savings account balance) + £1,500 (current account balance) = £11,500

Now, say for example, the interest rate you pay is 6% on your mortgage. You won’t be charged 6% interest on £100,000. You will pay 6% interest on £88,500 (£100,000 – £11,500= £88,500). This is an extremely flexible mortgage, because you can overpay each month without being penalised for doing so. What’s nice about offset mortgages is that they get your money working as hard as possible for you.

Bare in mind, you won’t earn any interest from your savings or current accounts because you are putting your savings against your debt in one account, you will be in the red zone. However, because rates for mortgages and loans are higher than savings and current account rates, it makes sense to offset your savings against your debts, rather than to earn the interest on it. And, because you are effectively regarded as having nothing in your savings account, you don’t pay tax on it.

Two types of Offset Mortgages

There are two types of offset mortgages available. The first is the Current Account Mortgage (CAM). A CAM package will total all of your accounts together. So you’ll have your typical bank account paired with the mortgage debt. This will produce quite frightening bank statements with your mortgage landing you heavily overdrawn. It’s more of a psychological hammer because you’re seeing your mortgage debt every month on a statement, which is something you don’t get with a traditional mortgage. In reality, you’re no worse off than you would have been with a traditional mortgage. Some people just prefer sweeping the crap under the rug.

A second type of offset deal allows homeowners to separate their accounts in to ‘virtual’ pots. This isn’t particularly different in concept, but it can have a psychological effect to know where your money is coming from, rather than simply receiving a huge reminder of how overdrawn you are in big red letters.

Are there any disadvantages with an Offset Mortgage?

It all sounds great, right? It is a good idea, and offset mortgages have saved people thousands of pounds. However, Interest rates on offset mortgages will very rarely be the best on the market. You could get a better deal on a traditional mortgage if you shopped around a little and remortgaged every few years. Consequently, offsetting is only worthwhile if you find an amazing rate (which is like finding gold dust) or if you have a reasonable amount of money sitting idle in your savings and/or current account.

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