Offset Mortgage
Before you apply for an offset mortgage it is important that you understand how it works, because otherwise you may not actually benefit from its savings capabilities. An offset mortgage is very similar to a current account mortgage and so it is very flexible with regard to repayments. Depending on the lender most offset mortgages allow for overpayments, underpayments, payment holidays and borrowing back.
How does an offset mortgage work?
An offset mortgage is a type of "all in one mortgage". It allows you to use your savings and/or current account to 'offset' an amount of your mortgage capital each month. This means your savings and your mortgage debt become one meaning your mortgage capital is autimatically reduced by the value of your savings.
Each month your income will be put into your account. You then spend whatever money you would usually spend on regular bills etc. The money left over is then used to (in a sense) repay part of your mortgage. More technically your savings are still available to you but they simply 'offset' your outstanding mortgage debt. The interest rate will be calculated daily so any reduction on the mortgage capital will have an immediate affect on the interest charges. Providing you keep repaying the mortgage capital as well as the interest charges each month, the interest charges should decrease gradually over the term.
An offset mortgage is flexible with repayments so you have the chance to pay-off your mortgage early and save money on interest charges. This could result in a massive saving over the mortgage term. This is particularly relevant to anyone who expects to receive cash bonuses through their job.
What's the difference between offset and current account?
The difference between a current account mortgage and an offset mortgage is that with an offset mortgage your accounts are kept separate so you can monitor each account individually.