Offset Mortgages Explained

What is an offset mortgages?

Most borrowers have savings. By using these savings to cancel out part of a mortgage, whatever amount can greatly help reduce a mortgage. Instead of earning interest on savings the monies are linked to the mortgage. As you are very unlikely to get a higher rate of interest on your savings than your mortgage provider is charging an offset mortgage makes a lot of sense. Savers will also avoid paying tax on the interest their deposits would have earned. As mortgage lenders usually calculate interest daily, every pound deposited is been used in the best possible way to reduce the amount borrowed.

Should I consider an offset mortgage?

Definitely! With interest rates at historic lows the likely hood is you are getting next to no interest on your savings at the moment. Worse still you will probably be earning interest at a lower rate than the current inflation rate therefore you money will be losing value! Now is a better time than ever to consider an offset mortgage.

What offset mortgages are available?

There are two types of offset mortgages. The first type is called a current account mortgage (CAMs). Your savings account would be linked to the mortgage to form just one account. Customers would see one statement were the balance given would be their mortgage balance minus their savings deducted. For example if you have £5,000 in savings and a mortgage of £75,000 then your balance would be £70,000. As mentioned above the interest is worked out daily with interest payable on this balance.

Additional CAMs allow personal loans and credit cards to be added into the account as well as any other savings.

The huge benefit being mortgage interest rates will be significantly lower than any rate attached to a credit card and most likely any credit card. This in itself will save a homeowner a significant sum in interest payments as well as give the convenience of having just one repayment each month.

There is another type with the difference being that the accounts are kept separate.

Pros and Cons

The main benefit especially at the moment being while interest rates are low is the money being used usefully rather than sitting in a low paying savings account. Lump-sum overpayments are possible without penalties incurred.

Unfortunately the chance of finding an offset mortgage with a market leading rate of interest is very unlikely. It will probably be cheaper to go for a more traditional mortgage unless you have a large amount in your savings account.