| || |
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.
| || 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.
| || 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.
| || 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.
| || Common features of a mortgage offset account. |
In summary, a good offset mortgage product should offer all or most of the following features:
| Flexibility with mortgage overpayments. |
| Ability to draw on savings at any time. |
| Variable and fixed rate options. |
| Buy to let as well as residential options. |