Offset Mortgages
Offset mortgages originally gained popularity in Australia before crossing to the United Kingdom in the mid 90s. They are credited for reducing interest repayments by way of offsetting your standard credit balance against the mortgage debt.
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This works in such a manner that if you have £20,000 stored away, and a mortgage of £150,000 – you will only be charged interest for the sum of £130,000. Your accounts will be added together – whether visually apparent to you or not – and as an added incentive, credit cards and additional debts can be combined in to the package.
The offset mortgage is definitely on the rise in terms of popularity and a large percentage of the population is expected to be opting for this package in the future. The key incentive focuses on cancelling out mortgage debt with the savings that most people already have on the side.
In return for receiving no interest on your savings, the mortgage repayment interest is significantly cut and this can make keeping up with the repayments that much easier, especially during the early years of the term. The ultimate goal is to pay off the debt earlier.
The current interest base rates are relatively poor so many people are choosing to plunge the money straight back in to their debts. You’ll find the marketing gurus working overtime to label offset mortgages as tax efficient savings, and this is all down to the interest generated in the deposit account.
There are two offset packages to consider. The first is known as the Current Account Mortgage (referred to as CAM in some quarters). A CAM package will effectively lump all of your accounts together. So you’ll have your typical bank account paired with the mortgage debt. This will produce quite frightening bank statements with your mortgage landing you heavily overdrawn, and that can be slightly intimidating to young buyers.
In a CAM deal, you’ll only pay interest on the balance. You can choose to add your savings in to the account and this will, of course, bite away at the interest.
A second type of offset deal allows homeowners to separate their accounts in to pots. This isn’t particularly different in concept, but it can have a psychological effect to know where your money is coming from, rather than simply receiving a huge reminder of how overdrawn you are in big red letters.
As an additional bonus, offset packages usually allow lump-sum overpayments without extra charging. You can take out your funds without needing to remortgage, and this allows a nice bit of flexibility.
On the downside, it’s highly unlikely that you’ll find an offset mortgage with interest rates lower than the more traditional alternatives. You also need to have some sort of savings for the offsetting to take place. If you have peanuts in your account, you may as well look elsewhere.
Offset mortgages don’t have to be as complicated as they sound. The important thing to remember is that you’re taking the interest on your savings and transferring them in to the repayments of your mortgage. It’s simply a drawn out procedure of “overpaying” which will hopefully lead to a shorter term.
Use an offset mortgage to start saving cash by visiting our
mortgage centre
