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What is an Offset Mortgage?
An offset mortgage is very similar to a current account
mortgage - but instead of having everything all in one account,
all accounts are held separately.
The offset mortgage concept treats your money as one giant
pot, with each element (mortgage, savings, current account etc)
separate to the rest. The result is basically a giant overdraft,
although it behaves differently.
Offset mortgages are where the interest on your mortgage is
reduced by the funds in both your savings accounts and your
current accounts. The more you have in your savings account, the
less interest you pay on your mortgage, which helps you to repay
your mortgage faster and more cheaply in the long term. Your part
of the deal is that you don't receive any interest on your
savings or your current account.
The interest is work out by taking the state of each account
separately and offsetting them against the others so that you can
benefit from your savings and pay less interest. A current
account mortgage allows you to benefit in the same way, except it
also acts a bank account so your salary goes into the same
account that your mortgage is in.
This is slightly different to the current account mortgage
because your mortgage account is separate from a savings and
income account that you open with the same company. Like the
current account mortgage, your income and savings are offset
against your mortgage, which reduces what you owe. The interest
is calculated on a daily basis on that reduced balance.
Offset mortgages work by setting the money held in savings and
current accounts against your mortgage debt. So instead of
earning interest on your cash balances, you pay less interest on
your borrowings. The idea of offsetting is that, with less
interest to pay, the mortgage is paid off more quickly and as a
result costs you less.
Some of these mortgages can even be linked to your other
personal financial commitments and arrangements. One of the main
attractions of these mortgages is the prospect of paying less
interest.
All your other debts, such as your credit cards or your
personal loans are also linked into the nest of products, and
this allows you to repay all of your debts at the mortgage rate,
which is likely to be a lot lower than your pay rate on those
borrowings.
A further advantage is that the credit cards and loans remain
unsecured borrowings even though they are paid off at the
mortgage rate, so if you can't keep up the repayments on those
your home is not at risk.
The people that will find offset mortgages very suited to them
are people with volatile incomes, such as the self-employed or
people often paid in large bonuses. People with significant
amounts of savings will also find offset mortgages useful.
If you do opt for an offset mortgage, especially one linked to
a current account, you can maximise its benefits by keeping your
cash in your account for as long as possible each month. With
interest calculated daily, each day's credit balance can make a
small difference.
The rate on an offset mortgage will be higher than the
cheapest rates available.
The benefit of the offsetting feature is that you can always
have access to your savings if you need them. So you can make
them work to pay off your mortgage, and access them when you need
to.
The advantage to the offset mortgage is that the feeling of
being in debt is not as all encompassing as with a current
account mortgage. However an offset mortgage is quite complicated
and you need to make sure that your accounts are offset in the
best possible way to benefit.
You may freely reprint this article provided the author's
biography remains intact:
About The Author
John Mussi is the founder of Direct Online Loans who help UK
homeowners find the best available loans via the http://www.directonlineloans.co.uk
website.
 MORE RESOURCES updated Thu. September / 09 / 2010
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