With savers struggling to find anywhere to put their money in the current economic climate, it is unsurprising that offset mortgages have been rising in popularity over the last couple of years. Offset mortgages were first launched back in 1994 in the UK but for a long time were very unpopular. However, as savers have begun to look around for the best place to make some money on their savings, contractors getting offset mortgages have seen a surge in demand thanks to the benefits they offer regarding thevsavings. Though the rates on offer from offset mortgages tend to appear less advantageous when compared to mainstream mortgages, in the longer term they can be very impressive, simply because they are able to cut years off of mortgage payments and allow savers’ money to work harder for them.
How do they work? In a nutshell, offset mortgages are simply mortgages in which you set your personal savings up against your outstanding mortgage debts and through giving up the interest you earn on your savings you do not have to pay the equivalent amount of interest on your mortgage debts. Over a number of years this can quickly add up to savings of thousands of pounds. This article will take an in-depth look at offset mortgages to help explain them better:
What is an Offset Mortgage and How Does it Work?
As mentioned above, an offset mortgage is a mortgage that is linked directly to a bank account (or a number of bank accounts). Every month the mortgage lender will then work out the full amount of interest that is owing on the mortgage and then this amount will be reduced by the total amount that is held in in the account (or accounts). As an example, if a borrower takes a mortgage of £200,000 and also has savings in their accounts of £20,000 then they will at that point only end up paying interest on £180,000. And if those savings were to go up or down in the months and years ahead, so will the amount of the mortgage on which the interest is charged also go up or down. For anyone who has savings this of course makes sense, particularly when there are so few savings accounts with decent interest on the market. By setting up an offset mortgage savers avoid any tax on savings interest they might have paid and their money works every day to bring down the costs of their mortgage – the act of paying interest on the difference between the balance and the savings effectively means that every month you are overpaying your mortgage.
Is there any Difference Between Current Account Mortgages and Offset Mortgages?
The difference is a small one, but some offset accounts let you link your current account and your savings accounts to the mortgage whilst others simply use things called a savings pot. Both essentially work in the same way. Offset mortgages keep your deposits and savings in these separate accounts or ‘pots’ but link the two together for the purposes of working out interest, whilst Current Account Mortgages (CAM’s) link the current account directly to the mortgage. With a CAM, borrowers will not see two different accounts but rather a mortgage and bank account combined on one single statement with everything calculated together. Thus, if the mortgage has £100,000 outstanding and there is £3000 in the current account the balance on there CAM account will show an outstanding debt of £97,000. In this CAM account the balance is recalculated every day and interest is paid only on that balance. Apart from that the account operates in exactly the same way as a normal bank account with all the same services and facilities. Additionally, borrowers using Current Account Mortgages can also move their savings into that account in order to bring the debt balance down further and can simultaneously also move any other outstanding debt such as credit cards or personal loans into the account.
What are the Benefits of Taking Out an Offset Mortgage?
As mentioned above, offset mortgages can mean you pay a lot less in interest every month, which can mean your monthly payments are significantly reduced. Or alternatively you can keep overpaying and clear your mortgage a lot more quickly. As well as this you have more flexibility with you money which you can access at any time and other accounts can be offset in various ways.
What are the Negatives of an Offset Mortgage?
The main downside is that any savings which you hold within your offset account will not earn you any interest. Moreover, if you don’t actually have many savings then you wont see much advantage in savings on your mortgage and may well be better switching to another mortgage deal.
That’s why offset mortgages are most advantageous for people with larger amounts of unused and stable savings. They can be a tax efficient mortgage for higher rate taxpayers and also useful for people with savings who want to help their family members by putting some of their savings in an offset account and helping to reduce the mortgage burden they are facing.