Offset Mortgage

With any other type of Mortgage - you pay the interest on the full amount you have borrowed each month.  An Offset Mortgage is different to the rest as it combines all your accounts into one - you only pay interest on the amount of your Mortgage minus the amount you have in your savings and current accounts.

Using the balances in your savings and current accounts in this way means you can reduce the amount of interest you pay on your mortgage.

Confused?  This is easier to explain with an example;

Imagine your mortgage balance is £100,000, you have £10,000 savings and your current account balance is £2000.

With a Standard Mortgage you would pay interest on the £100,000 mortgage balance.

With an Offset Mortgage, your accounts are combined, so your equity is used to ‘offset’ your debt.
£100,000 mortgage minus £10,000 savings, minus £2,000 current account  = £88,000 of outstanding debt. 

You are only required to pay interest on this £88,000 outstanding balance.

Up and Down

An Offset Mortgage takes into consideration that the amount of money in your savings and current account will change on a monthly [if not daily] basis. 

Pros of an Offset Mortgage;

• it shelters any money in the offset account from taxation
• it uses the interest earned on savings to either reduce your monthly payment or repay the mortgage faster by reducing the term
• it could enable you to pay off your mortgage early.  Typically, Offset lenders do not penalise the borrower for doing this
• lower payments each month, as the amount of your debt is reduced by offsetting your savings and current accounts

Cons of an Offset Mortgage;

• some people think Offset Mortgages are complicated and could find it difficult to keep track of their finances
• interest rates are generally higher than standard mortgages.  To take full advantage of an Offset Mortgage you need to have positive balances in your savings and current accounts
• you need to have all your accounts with the same lender

Seek Professional Advice

If an Offset Mortgage appeals to you, seek the advice of a professional advisor.  They can explain the full process and will make sure you are set up to take full advantage of the benefits that an Offset Mortgage offers.