My Guide To Offset Mortgages
As a homeowner with a mortgage to pay, you would probably like to have the opportunity to pay off the outstanding balance of your mortgage early. The good news is that there is a way in which you can pay off the outstanding balance of your mortgage, and it is commonly know as the offset mortgage. Offset mortgages are becoming a more and more popular way of paying off the outstanding balance on a home loan.
Introduction To Offset Mortgages
The way in which an offset mortgage can help you to pay off your outstanding debt quicker, is that you take any savings you set them against your outstanding mortgage debt, the interest on your savings is waived and in exchange, you do not have to pay the same amount on the mortgage that you still owe. Paying your mortgage this way can save you a tidy sum of money over the lifespan of your mortgage, and over 25 years you could potentially save yourself thousands of pounds, and it is very efficient on tax as well.
Most people who have a mortgage will likely to have some money tucked away in a savings account, and no matter how small these savings are in total, making use of them to pay off mortgage debt makes very good sense in the long term.
People who are saving will not have to pay tax on the interest that their savings generate, and this is handy for the reason that, mortgage lenders who offer offset mortgages typically calculate the interest on a daily basis. This means that for each single pound that is deposited is put to work in helping to reduce the cost of the mortgage. Another plus point, is the fact that when interest rates are low, your savings will be earning a higher interest rate than the majority of the savings accounts that the high street banks offer.
Variants of the Offset Mortgage
Current Account Mortgage – With some offset mortgages you will be offered the choice of linking your current account or accounts as well as your savings, to the mortgage. Whilst other lenders will just make use of a pot of savings which is known as a flexible mortgage, both methods basically operate in the same way.
Flexible Mortgage – As detailed above, the flexible mortgage is a mortgage that uses a savings pot to offset the interest payments on your mortgage. This means that you are technically overpaying on your mortgage and therefore you will pay off the outstanding balance quicker. With a flexible offset mortgage, should you have enough money in the savings pot, you can actually underpay should you need to save money.
Savings Example of the Offset Mortgage
So for example, if you have a mortgage of £150,000 and you have £20,000 in savings, then the interest on your mortgage will only be charged up to £130,000. Plus, as well as using the savings pot, you can also make one-off over-payments whenever you like, and the great thing about the flexible mortgage is that so long as you have enough money in your savings pot, you can underpay and take a payment holiday.
Who Suits The Offset Mortgage ?
Typically, those people who are more suited to an offset mortgage will have a significant amount of money in savings. This is because it is those savings that are used to offset the cost of the interest payable on the mortgage. So therefore, if you do not have any savings then applying for an offset mortgage may not be your best option.
There are some building societies that have special family offset mortgages, and these are to help parents to get their children onto the property ladder. The parents will be able to use the money in their savings accounts to offset the interest payments on their children’s mortgage in order to lower their monthly repayments. The beauty of this method is that the parents can still gain access to their money should they need to.
As many as a quarter of families in the UK could gain financial benefit from signing up to an offset mortgage, however, experts warn that this type of mortgage is not suitable to everyone, and that most people would be far better off with just going for the lowest interest rate they can get.
The majority of offset mortgages on the market have interest rates that are tracked by the base rate set by the Bank of England; however, if you search hard enough then you can find an offset mortgage that comes with a capped rate or a fixed rate.
If you are unsure that an offset mortgage is right for you, then you should talk with your mortgage broker or mortgage specialist at your bank for more advice.