Offset mortgages are a type of flexible mortgage that allow borrowers to reduce the interest charged on their mortgage balance by offsetting the balance of any savings they have accumulated in a specified deposit account.
For example, an offset mortgage that has a balance of £350,000 could be offset against a deposit account that has a positive balance of £80,000. The interest that will be charged to the mortgage borrower will be calculated on the net balance of £270,000 instead of the full mortgage balance of £350,000.
There are several different types of offset mortgages. Although most offset mortgages are basically the same, in that the balance of savings in a deposit account is offset against the mortgage balance, some lenders structure their offset mortgages in different ways.
One such way in which offset mortgages are structured is to separate the various financial products included in the package. These products may include any combination of the offset mortgage itself, current accounts, savings accounts, credit cards, and loans.
A different way in which offset mortgages are structured is to combine the products into a single facility. These offset mortgages are commonly referred to as a current account mortgages.
While the specific features of various offset mortgages differ, some of the common features include: the ability to offset the mortgage balance and the balance of the deposit account; overpayments and underpayments; additional borrowing to an agreed upper limit; payment holidays; daily interest calculations; the ability to transfer the mortgage to another property; a choice between capital and interest or interest-only repayment types; a flexible term of the offset mortgage – usually between 5 and 25 years.
Interest is not usually earned on the balance of the deposit account. Instead, it is offset against the mortgage balance in order to save interest on the offset mortgage. This can help reduce the income tax liability of the borrower because tax is normally charges on interest earned from a deposit account.
Despite all the benefits of offset mortgages, there are several disadvantages that must be considered. One such disadvantage is that a higher rate of interest is normally charged on offset mortgages than for standard mortgage products.
Borrowers should therefore carefully assess whether offset mortgages are right for them before applying. Unbiased advice should be sought from an independent mortgage broker if there is any doubt.
Visit
UK Mortgage Source for up-to-date news on
Mortgages and to contact a mortgage advisor near you
