Offset Mortgages

An offset mortgage can help reduce the interest owed on your mortgage and help you complete your repayments more quickly and cheaply. There’s no danger to you or your home, and there’s probably no better way to pay off your debt on your terms. It sounds too good to be true, but it isn’t. It sounds as if there must be a catch, but there isn’t. If it sounds like the sort of deal that might interest you; read on…

An offset mortgage might just be the best mortgage you’ve never considered. For a while it was deemed too new and gimmicky for UK borrowers and rarely brokered, let alone considered. But times have changed; the offset mortgage is a viable and valuable addition to the portfolio of mortgages at your broker’s disposal. Since its introduction from Australia in the mid nineties, the offset mortgage has made a lot of UK mortgage payers very happy – and considerably better off!

Here’s how it works: ordinarily mortgages are repaid at a monthly rate which is based on the sum of the original figure that you borrowed and the interest accruing on that loan. (Interest only and endowment mortgages are the obvious exceptions here.) An offset mortgage is altogether different. Instead of paying off standard monthly increments, the offset mortgage lets you call the shots. Pay off as much or as little as you want. That’s the first advantage.

The next advantage is this: offset mortgages are offset against a sum of money (probably your savings account and/or current account.) This means that every penny in your account is counted against the value of your outstanding mortgage - and the interest on the debt is reduced accordingly. So instead of paying interest on the whole amount, you’ll only ever have to pay it on the value of the mortgage minus the value of your savings. Therefore if your mortgage is for £90,000 and you’ve got £30,000 in savings, then you’ve automatically cut the interest accruing part of your mortgage down to £60,000. (In effect, it’s as if the money you owe to your lender is being held in trust until it’s required.)

But the benefits don’s stop there: when you offset your savings against your mortgage, not only will you reduce your overall debt; you’ll also make money into the bargain. At the time of writing, the interest rates for savings are low. So even if you’ve got a small fortune stowed away at the bank, it’s going to have to work exceptionally hard to net you any substantial interest. So how about this to pique your interest: instead of struggling to make a paltry two per cent on your savings, offset your mortgage against your bank account and your savings will actually be made to work harder than ever to reduce your mortgage payments and hasten your final payment. You’ll cease to claim any interest on your savings; instead you’ll negate the higher interest charges on your mortgage, and your savings will actively contribute to the exponential reduction of your debt. In the long term, you’ll save money, and you will effectively make money!

So instead of having next to no return on your savings investment, you’ll get a real sense of wearing down your original loan into something substantially less onerous. You can work it out for yourself. Even a few thousand pounds accumulating interest at two or three per cent over twenty years is never going to be any match for reducing interest payments on your mortgage, based on a loan of tens of thousands of pounds and charged at anything up to 7%!

The offset mortgage is perfect for people with unpredictable incomes, particularly the self employed and anyone whose work nets plenty of big bonuses. All it takes is a few thousand pounds in savings for you too see the difference; the more you pay in, the better it gets. And just in case you were thinking that offset mortgage was all out of benefits, don’t forget that because you won’t be earning any interest on your savings, you won’t be taxed on them either!

Offset mortgages shouldn’t be off-putting. They can give you the power to take control of your mortgage, like no other mortgage on the market. More power to you!