Offset mortgages
What is an Offset Mortgage?
Offset mortgages are a new type of products to the uk Mortgage market and can help people reduce the term of their mortgage dramaticly. With an offset mortgage the interest owed on the mortgage is offset against the interest earned on savings.
How Does an Offset Mortgage Work?
As mentioned above, offset mortgages work by ‘offsetting’ your mortgage payments against your savings or in even more modern mortgages, your current account. This however does not make clear the benefits of an offset mortgage.
The intrest rate paid on your mortgage will be higher than that paid to you on your savings so the main benefit is getting the difference between your lenders rate and your saving rate for free. What this means is your savings effectively earn the rate of interest your mortgage is charging.
It also has tax saving implications for certain individuals.
Example of an Offset Mortgage:
Ofset mortgages can be hard to get tyour head arround, mainly because the maths is a little too creative for most but it is actualy quite simple, imagine the following:
Mortgage: £200,000
Savings:
£50,000
Mortgage Interest Rate 5%
Savings Rate: 2.5%
With an offset mortgage the following equasion can be used:
((Mortgage borrowing - savings) / 100) * Mortgage Rate
Fixed Rate Using savings to top up:
(£200,000 @ 5%) - (£50,000 @ 2.5%) = £8,750 per annum (£10,000 - £1,250)
Offset Mortgage:
£200,000 - £50,000 = £150,000
£150,000 @ 5% = £7,500 per annum
This has saved the borrower £1,250 or in other terms, over 16% of their annual mortgage commitment!
Who are offset mortgages for?
Offset mortgages start offering advantages to people who hold the equivilent of 10% (or more) of their mortgage borrowing in savings. Newer, more complex products now take advantage of current account balances so this 'equivilency rate' is slowly dropping.
If you do have a reasonable ammount of savings an offset mortgage should be considered as they can reduce your mortgage term by over 8 years! However take more time to review these mortgages as they cannot easily be compare to any other sort of mortgage.
Offset mortgages tend to have marginally higher interest rates