The Fundamentals of an Offset Account

An offset account is a clever account because it link’s savings and a loan, normally a mortgage, and uses the savings account to offset the loan. The savings account balance stands in as the figure to be offset from the total outstanding mortgage. The interest earnt on the savings is calculated on a daily (some have monthly) basis, thus ensuring optimum utilisation of even a minimal savings balance. In this schema, therefore funds if lying unused is automatically directed to offset the mortgage payments, while if required are readily available. Moreover, various offset mortgages enable the flexibility of underpayments, overpayment and payment breaks and thus the liberty to clear the loan early, sometimes without incurring early repayment charges.

The outlined details can be understood with a simple numeric illustration. If the total mortgage value is £ 150,000 and the balance in the savings account on a particular date is £ 20,000, the loan interest will be calculated on the balance amount i.e. £ 130,000. Thus with the offset account settings in place, every pound you save, assumes an augmented value. It is important that you have enough savings to properly offset against the loan because with some offset accounts, the interest rate is set at a higher level. In few deals, the charges tend to fluctuate with the BoE (Bank of England) base rate. With the positives in the forefront, the effort is certainly worthwhile, especially for those who tend to save and maintain positive balances in the savings account.

Offset Account Variations

The above stated details of an offset account are usually referred to as the 100% offset facility. A variation of this is the partial offset account deal. Herein, instead of the difference between loan and savings, the difference is between the interest earnt with a savings account and the interest levied on a home loan/mortgage which is used for offsetting. I.e. the interest is reduced by the difference. As apparent, the benefits of a partial offset account are gravely diminished in this account type.

Another option in this category is a family offset account. This mortgage type links the savings accounts of family and friends with the borrower’s loan account, thus generating additional benefit.

In addition to the stated two, there are a number of possible customised variations. For instance, some lenders might offer enhanced flexibility, while other lenders could extend lower charges. It is therefore suggested to extensively shop and analyse all the possible offers before selecting any offset account.  

Advantages of an Offset Account

The offset account perfectly utilises every spare penny, as the savings are optimally used to considerably lower the mortgage interest charges. Moreover, because the savings are used in lowering the mortgage total, no tax is levied on them.

Suitability of an Offset Account

An offset account is an intelligent selection, provided you can save and thus maintain a decent balance in the linked savings account. To finally decide upon the suitability aspect of having an offset account, try creating a hypothetical account, wherein you could compare the two deals. One section should refer to any other mortgage deal i.e. a fixed or flexible, which you would compare against the offset account and the other section should take offset account schema into calculation. Input approximate figures with the average savings for the last 6-8 months to assist the analysis. If carefully drafted, this should help achieve a clearer picture and thus confirm appropriateness of an offset account. Additional advice can also be obtained from professional brokers and mortgage consultants as they have concise mortgage market understanding, and are well equipped to assist your decision in whether or not an offset account is suitable.