Offset Mortgages

A relatively new product on the UK mortgage market, an offset mortgage allows borrowers to put all their debts in one place. Customers who take out an offset mortgage will link a savings account to a current account. This type of mortgage works by taking advantage of your savings. Instead of earning interest on your savings, your money is used to reduce the balance of your mortgage debt.

Advantages

Because you have the ability to view and manage your finances the way you want, you have more security and flexibility. Any savings you have are earning interest at a higher rate than most conventional savings accounts. You pay a single low interest rate on everything you borrow. This includes your mortgage, loans, and credit cards. As well, you will avoid paying tax on interest that the deposits would normally have earned. With offset mortgages, lenders calculate the interest on a daily basis. Each deposit that you make reduces your borrowing costs. Each month, you have the flexibility to determine the amount you will pay. Offset mortgages are a good option for anyone with a large amount of cash. They can also be good for people who are self-employed, or receive annual bonuses. By putting money that has been set aside for tax reasons into an offset savings account, homeowners can benefit by having the money work to pay down their mortgage debt.

Disadvantages

Interest rates are often higher than a standard discounted rate. Fixed rate mortgages are more stable than offset mortgages. In the past, offset mortgage rates have tended to be about one per cent or higher than the best fixed rate mortgage deal. However, this appears to be gradually changing. If an offset mortgage is not managed correctly, you could find yourself paying more than you expected.

Lender Stipulations

Lenders will normally stipulate a set credit limit. Borrowers can make deposits and withdrawals up to this limit. Towards the end of the mortgage term, the lender may place restrictions on the lending limits. The purpose is to ensure that the lender receives its capital repayment. However, many lenders will allow full withdraw privileges up to the end date of the mortgage. This can cause many problems for undisciplined borrowers and people approaching retirement. It can especially be difficult if the lender is unwilling to extend the term. Some lenders have a single account for all transactions. This type of account is often referred to as a current account mortgage. Other lenders have multiple accounts. In most cases, there is a mortgage account and a deposit account.

Considerations

Offset mortgages provide consumers with the ability to manage their own repayment structure by allowing overpayments and underpayments. If you are disciplined and manage the mortgage correctly, you could see your mortgage term decrease sooner. If you are undisciplined, you could face some unexpected financial problems. It is important to seek independent financial advice to make sure that this is the right mortgage for you.