An increasingly popular way of paying off a mortgage earlier than might be the case with standard mortgage types is an offset mortgage. Most home buyers usually have some form of savings: an offset mortgage allows them to use this money to reduce mortgage debt.
What is an Offset Mortgage?
Though similar to more traditional mortgages (such as repayment mortgages, endowment mortgages and interest only mortgages) where repayments are made each month, offset mortgages differ in that are linked to another, or even multiple, bank accounts. This enables the borrower to either reduce their monthly payments, or shorten the term and help them become mortgage free sooner. Offset in this case means that normal monthly repayments of interest due on any outstanding mortgage loans is balanced with any savings held, and can help home buyers save thousands.
How do Offset Mortgages Work?
Each month, the amount of interest owed on a mortgage is calculated by the total amount borrowed for the property. With an off set mortgage, the amount of interest is also reduced by the money held in the linked accounts. These savings do not, however, actually repay any of the mortgage but simply sit alongside it and save borrowers interest on their mortgage loan.
For example, if a person has borrowed £200,000 and has savings of £20,000, they will only be paying interest on £180,000. The amount of interest that is owed will therefore fluctuate depending on whether the borrower’s savings go up or down.
The best offset mortgages are considered to be those which pull all the borrower’s finances into one account alongside the mortgage, i.e. a mortgage linking the borrower’s current, savings, and personal loans accounts together. On a daily basis, assets and savings are added up in order to offset them against the mortgage holder’s debt. As a result of this, mortgage redemption can occur more quickly than is usual, with substantial amounts of money in interest payments saved.
Fixed Rate Offset Mortgages
A common assumption is that offset mortgage interest rates are substantially higher than those for more traditional mortgages, though this is not the case. If a borrower is looking for a mortgage and shops around for the best offset mortgage rates, very competitive off set mortgage products can be found. A fixed rate offset mortgage is well worth considering, particularly in times when interest rates are rising: in such periods fixed rate mortgages can save borrowers lots of money.
Buy To Let Offset Mortgages
Off set mortgages are versatile and can suit different people for different purposes. A buy to let offset mortgage may be ideal for landlords with large savings from their other business dealings who want to use these savings to bring down their borrowing costs.
Family Offset Mortgages
With family offset mortgages, parents can put their savings into an account linked to their child’s mortgage. The money isn’t be available for the child to spend, but it will certainly create huge savings when repaying the debt, particularly if all family members link their accounts to the family offset mortgage.
Disadvantages of Offset Mortgages
There are nevertheless a few downsides to offset mortgages. Not only will the savings held in offset accounts not earn any interest, but if the person or family taking out the mortgage don’t have much saved they will not save much on the mortgage: this renders these types of mortgages impracticable for those less well-off.
Offset Mortgage Calculators
An offset mortgage calculator will assist in assessing whether an offset mortgage is suitable for any given borrower’s financial situation. Such calculators should include additional mortgage fees and usually have an option to calculate answers using a number of different mortgage rates. In addition to this, using online comparison sites can help find the best offset mortgage deals; after using them it’s a simple matter to approach suitable mortgage lenders.