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An mortgage offset account may be attractive to
anyone who can hold significant funds in an account for
longer periods.
Offset mortgages are especially suitable for people who
are able to save or those who derive an income based on
large but infrequent lump sum payments. |
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What is a mortgage
offset account? |
Mortgage
offset accounts work by linking deposits or savings with your
outstanding mortgage balance. Instead paying you
interest, the money in your savings account is used to
reduce the liability on your mortgage.
Because your mortgage balance is effectively reduced by
your savings, the mortgage interest will be calculated
using this reduced balance and not the full amount
outstanding on the mortgage. If for example your
outstanding mortgage is £100,000 and you have £20,000
savings, you would only pay interest on £80,000.
If you decide to keep your monthly mortgage payments at
the same level, initially calculated using the full
mortgage balance, your savings will help you reduce the
term of the mortgage and you may be able to pay off the
loan much earlier.
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Advantages of a mortgage
offset account |
In
addition to using your savings to reduce the interest
payment on your mortgage, an offset mortgage can offer a
high degree of flexibility with the ability to pay off
sizeable chunks of the loan without early redemption
charges.
Interest payable on savings is normally subject to tax,
but with an offset account the interest is effectively
calculated at the mortgage and then offset, so there is
no tax to pay. The higher your tax band the more you
could save.
If your traditional savings account is paying a low rate
of interest, switching to an offset account can get your
savings working harder by reducing your mortgage debt.
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Drawbacks of a
mortgage offset
account. |
Interest
rates on offset mortgages are normally higher than
mainstream mortgage products and you could probably find
a cheaper deal without the offset facility. Unless you
have the savings available to work for you, a
traditional mortgage may be more attractive.
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Common features of
a mortgage offset
account. |
In
summary, a good offset mortgage product should offer all
or most of the following features:
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Flexibility with
mortgage
overpayments. |
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Ability to draw on
savings at any time. |
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Variable and fixed
rate options. |
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Buy to let as well
as residential
options. |
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