Offset Mortgages

What is an Offset Mortgage?

The commonly used mortgage in the United Kingdom for the purchase of domestic property is called offset mortgage. Contrary to ordinary notions, offsetting is not a complicated method. Offset mortgage a great way to save cash!

An offset mortgage works by determining the money you have in current or savings accounts against the money you do not have to reduce what you owe. In this type of mortgage, you earn no interest on your cash and can get it back any time you want, without need of paying any interest on the equivalent amount of mortgage balance.

This works best if you have considerable amount of savings because the lesser will be your interest.

How do Offset Mortgages Benefits You?

  • Savings in interest - In any loans or mortgages, you are likely to be paying out far more interest on your debt than you earn on your cash balances. By availing the offset mortgage, you are reducing your monthly interest bill.
  • Hassle-free In most cases, offset mortgages are for long term basis. You avoid remortgaging your property after every few years.
  • No early redemption penalty While other loans impose penalty for early redemption, offset mortgage does not. This somehow can be considered as savings if you have availed of a different type of mortgage.
  • Flexible Payment Schemes many offset mortgage terms allows over and underpayments or payment holidays.
  • Loan Increase if you need extra cash, your loan can be increased in.
  • Portability in offset mortgage you can move house without needing a new mortgage.

Offset Mortgages Payment Options

  • Paying “net” - You can reduce your monthly repayment accordingly by paying “net” which can be very helpful if you are short of cash.
  • Paying “gross” - You can pay “gross” if you can afford it. This is better if you have the money because it pays your debt more quickly, saving more interest along the way.

Two Types of Offset Mortgage

As mentioned above, an offset mortgage can work if the money is used to reduce the amount you owe. You do not earn any interest. Therefore it is easier for you to get your cash back whenever you want it. But as long as you leave it in the offset account, you do not have to pay any interest equal to the amount of your mortgage balance.

  1. The current account mortgage
    This is the most extreme form of offset, with your offset mortgage account substituting in the place of your all other accounts.

  2. The ordinary offset mortgage
    is the non-current account type and only substitutes your savings account. All your savings balances and cash on hand at the end of every month are moved into an offset account provided by the lender. Although they are separate accounts for your savings and mortgage, the savings are offset against the mortgage balance, thereby reducing your monthly interest.

If you consider taking this option, remember to check your accounts, consider your future expenses and investment to have a clearer idea on what you are getting into.