An offset mortgage may be an option some people would like to consider and is a relatively new sector on the mortgage market. It offsets the amount of interest the homeowner pays on their house by considering the money they have available in savings accounts and current accounts.
The more cash available, the less interest that needs to be paid on the mortgage. This is because the person pays interest on the remaining value of their mortgage but only after they have subtracted the value of their current account balance. For example if £200,000 is left on a mortgage but the consumer has £20,000 in their current account then they would only pay interest on the £175,000 that is left in credit. This means they pay less interest over the life of an offset mortgage than they would a normal mortgage.
An obvious benefit of this sort of mortgage, in theory, is that a loan can be repaid faster and cheaper.
It is possible for all credit card debt, personal loans and further debt to be incorporated into the nest of products, which could possibly lead to a lower rate of repayment. These debts can also remain unsecured - not linked to a home. However, this turns short-term debt into long-term debt and might not always be the best option financially.
In some ways an offset mortgage shares features with a current account mortgage, which also allows people to roll all their debts up and offset any credit they have against them. The one important difference though is that with a current account mortgage, the house loan, credit cards and other debts are all part of the current account, effectively causing a very large overdraft. In contrast, an offset mortgage allows all the accounts to be kept separate, while still retaining the offset benefits.
Is it right for me?
The popularity of the market is growing and now accounts for many of the new mortgage approvals. It may prove best suited to those who have large incomes or one that can vary from month to month. Those with good savings amounts can also benefit.
Even those with smaller savings or none at all might like to consider the option, as paying a regular salary into a current account and using this to offset against the mortgage could still save money on repayments.
It will still go some way to reducing mortgage repayment, although the amount will vary. In addition to this, having an offset mortgage does not make any difference to how an account operates, providing the holder with just the same access to funds as previously.
What are the options?
The current market has made it more of a challenge for people to obtain finance from the banks, however, offset mortgages are possibly among the most hardy at present. Many offset mortgages state the customer should keep a certain level of balance in the attached account. This is done as a way of attempting to lower the risk of repossession, which is in the interest of the lender.
In some ways offset mortgage accounts are also similar to flexible mortgages. Many offset mortgage offers allow for lump sums to repaid without penalty and for payment holidays to be taken when customers have overpaid within a particular period.
It might be important to remember though that underpayments and payment holidays could increase the mortgage term and/or the total amount payable.
The price for all this flexibility comes in the offset mortgage rates, which are typically higher than those for standard mortgages. Rates are usually variable and fluctuate along with the Bank of England's base rate.
However, it is worth considering the figures to see if this type of mortgage offer is the right one. Offset mortgage holders who make the most of the offset account features usually repay their mortgages earlier than other mortgage holders by as much as eight years and eight Months and also pay less in interest.
Offset mortgage offers can work best for people who are able to save.
Although it is an option for those with smaller or less consistent savings, these people may not be able to make the most of the offset mortgage deal, as the key is to use the flexibility to repay as much as possible and to pay as little interest as possible. Those who get lump sums such as bonuses or dividends may also find that the flexible repayment scheme negates any higher offset mortgage rates.
An offset scheme may also suit those who are self-employed, who may receive money intermittently and may find it useful to repay less at some times and more at others.
People who fit any of these profiles could consider an offset mortgage in order to keep money in their pocket instead of the bank's.
As always it is wise to do some research about the various deals on offer, although it may also be worth speaking to a mortgage broker who will have all the latest deals to hand. They will also be able to assess an individual's circumstances and help them decide whether an offset mortgage is the right choice and if so, which specific option.
What are the benefits?
Aside from those already mentioned, offset mortgages are now available as single or joint accounts and allow people to offset current accounts, savings and ISAs. Some will allow for overpayments when financially healthy.
Disadvantages
For the extra flexibility that an offset mortgage will provide, there will often be a slightly higher typical rate to pay.
Fewer fixed rates on offers and not as many interest only deals are also likely, so these mortgages are perhaps best suited to those who are likely to be able to put large lump sums in the account regularly.
It may sound right for first time buyers too thanks to the flexibility and the fact that offset mortgages are often lent on affordability terms rather than an income multiplier which means they can borrow more than normal if they can show it is within their ability to pay into the account.
However, at the same time with very little savings it is normally less appealing than the typical first time buyer discount mortgage which allows for significantly lower repayments in the first couple of years.
To compare the latest offset mortgage products from leading UK lenders click here.
Author: KYM Editor
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