Offset Mortgages
An offset mortgage is more flexible than a standard mortgage. The idea is that the mortgage debt is held in one account while other credit balance accounts, such as savings and even a standard current account, are offset against that debt.
While the debt and all credit accounts are kept separate from each other as usual, they’re all taken into account when the lender calculates interest on the mortgage. This means one of two things can end up happening:
◉ You’ll pay less interest on your mortgage each month
◉ You’ll be able to pay off your offset mortgage earlier than you’d otherwise be able to do
The exact way an offset mortgage works will depend on which lender has supplied the mortgage. However, the principle is the same – the borrower may get a better deal and pay less overall with an offset mortgage compared to a regular mortgage.
What’s the idea behind an offset mortgage?
It’s one thing to read about the principle of such a mortgage, but quite another to figure out how it might work for you. Let’s lay it out here to see how it works.
Most people with mortgages also have a current account. They usually receive their wages into this account and pay bills from it too. They might also have a savings account (or several, in some cases). Many people try to put some money away each month for emergencies and as part of planning for their financial future.
In most instances, the mortgage, savings, and other credit balances are kept separate from one another. However, an offset mortgage means that all these accounts are with the same bank or building society. The credit balances on the accounts are offset against the debt of the mortgage. You then only pay interest on the remaining debt, while not receiving any interest on your savings and other credit balances.
How does it work in practice?
Let’s say you have an offset mortgage for £250,000. You have a savings account with the same lender with £50,000 in it. Let’s also assume your current account has £500 in it for the purposes of this example.
So, instead of paying interest on the full £250,000, you’d only pay interest on £199,500. The advantage here is clear, but it’s not the end of the story for offset mortgage advantages.
Offset mortgage lenders always calculate daily interest rather than monthly. This means the amount you’ve got in credit accounts works for you every day. You won’t just get a smaller interest payment either – you’ll also avoid tax payments on the interest your credit balances would otherwise have received.
Is an offset mortgage right for you?
Some allow overpayment, payment holidays, and even underpayments within the terms of the mortgage. However, you may find interest rates are slightly higher, with a chance the same might apply to fees.
The best way to work out whether a flexible or offset mortgage is right for your needs is to compare them to standard mortgages. Doing your sums should help you get the answer.