The mortgage superhero. The offset.

Posted on 5 December 2012 by Simon

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The mortgage superhero. The offset.

Whilst perusing the papers on Sunday, one article caught my eye, not least because the headline looked completely misleading. “Offset lenders shut the door on overpayers.” The article proceeded to claim that hundreds of thousands of borrowers with ‘flexible’ mortgages (not offset), are being refused access to the monies they’ve overpaid. It singles out a particular case in point, where a borrower with a flexible mortgage was refused access to some £60,000 he had overpaid. The borrower concerned had built up the sum over a period of years, and when he contacted the lender to ask for some of the funds back, after answering a series of underwriting questions, the request was turned down.

The case in point highlights the difference between ‘flexible’ and ‘offset’ mortgages, and led me to think about the overall benefits of an ‘offset’ mortgage against the more traditional products. An Offset mortgage is one where savings and/or current account balances are ‘offset’ against the interest charged on your mortgage balance. i.e If you have have a £150,000 mortgage, and £20,000 savings, then interest is only charged on £130,000. These savings can be used to either lower your monthly mortgage payment or enable you to pay off your mortgage earlier than planned, which could save you a lot of money. Either option is likely to be of far greater long term benefit to you than continually chasing the latest (and cheapest) 2 year rate.

In an era where people are looking to reduce their debts, and get rid of them altogether as soon as possible, offset is a much underused tool. It is not just saving money on your mortgage payments, or reducing the term that offset can be used for. For higher rate tax payers, an offset account is a far more tax efficient use of your savings, while for the self employed, you can keep the funds for your tax bill in the offset account, or for those borrowers who receive large bonuses, paying them into an offset account is also a far more efficient use of the funds. You could also use your offset savings to cover school or university fees, and with many of the offset lenders, you can have more than one savings account, so you can use an offset account for multiple purposes, but keep each one separate.

Whatever your future plans you may have for your money, the most crucial point is that unlike a “flexible” mortgage, your overpayments are held in a savings account and can therefore be withdrawn without having to go ask for the money back from your lender.

With the bank rate looking unlikely to move from its historic low of 0.5% for some time to come, normal (instant access) savings accounts, continue to offer poor returns for many savers, who are also mortgage borrowers, and offset represents an ideal opportunity to make far better use of both. It’s nothing less than a superhero...

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