The Broker: Mortgage advice from the experts mouth - Offset mortgage buys flexibility
Written on 13 September 2016 by
What is an offset mortgage, and who should have one? WHILE last month's bank rate cut was good news (allegedly) for borrowers, it heralded more bad news for savers, as once again they saw the return on their money hammered downwards. Some 285 savings accounts cut their rates last month, with 20 of the best deals disappearing completely. But for anyone who has both savings and a mortgage, there's some light at the end of the tunnel. No, it's not a train coming the other way, it's an 'offset' mortgage.
Basically, offset mortgages use your savings to reduce the amount of interest you pay on your mortgage by linking the two together. Effectively, this means that the money you have in savings is counted as a temporary interest over-payment towards your mortgage. So, for example, on a £200,000 mortgage if you had say, £40,000 in savings, then these funds would be 'offset' against the balance and so you would only pay interest on £160,000. Therefore if you keep your mortgage payment based on the full £200,000 loan, you are overpaying your mortgage, so you could potentially pay off your loan quicker than the expected term.
The real beauty of the 'offset' mortgage, is that your monies are just in a savings account, and therefore you retain full access to them if you should need them, whereas if you used them to make a capital repayment off your mortgage, and then wanted the funds back, you would have to ask your lender for a further advance, with no guarantee that they'd give you one. Offset gives you complete flexibility. Some lenders will allow you to have lower monthly payments based on the net value of the outstanding mortgage balance. This brings down your monthly payments, rather than helping you pay off your loan early.
Anyone who has savings of about10 per cent of their mortgage loan should be looking at the potential benefits of 'offsetting'. It's particularly useful for higher rate tax payers - as there's no interest paid on the money in your savings account, there's no tax liability, either. Also, self-employed borrowers could use their savings for their annual tax bill.
As the monies held in offset accounts don't earn interest, if you don't have much in savings, it's possible that 'offset' isn't the right option. This is a slightly more complex product than the norm, and it's important to go through the pros and cons of offsetting with your mortgage broker first.
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