Real Estate

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.

About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.