Are Offset Mortgages Your Flexible Friends?
With changing lifestyles and the way in which money is coming into the home such as bonuses, self employed income and other forms of income it is easy to see why offset mortgages are starting to become more popular as homeowners are looking for far more flexibility.
Offset mortgages have been around for a few years now and have grown from a couple of providers to around 40 in 2007. Having an offset mortgage allows the borrower to offset any cash they have in their current account or savings account which will reduce the mortgage interest they pay. This is worked out by effectively reducing the overall mortgage debt by deducting the balance in the offset account.
For example if the mortgage holder has a £180,000 mortgage and their savings amount to £30,000 then interest is only paid on £150,000. This can give quite a dramatic saving on the monthly interest payment and help reduce the overall payment term.
Main Benefits of an Offset Mortgage
- They are mainly very flexible and will allow overpayments and underpayments.
- You may find offset mortgages have a competitive borrowing rate.
- Any interest earned which is offset against the mortgage is tax free.
- Are advantageous for those who can save large amounts of money as it reduces mortgage interest payments.
- In the current credit crunch the interest earned in a conventional savings account is likely to be far lower than the mortgage interest rate, so having the savings offset against the mortgage is far more efficient.
Drawbacks of an Offset Mortgage
- Offset mortgages demand great discipline. It can be all too easy to use the flexibility and draw funds back out of the mortgage and blow on lavish purchases. This increases the mortgage amount and increases the interest payments.
- You may have to use the lenders own accounts for your savings or current account making you tied to their products.
- There are not many offset mortgage products to choose from compared to other types of mortgage product.
- These mortgages are only efficient if quite a large sum is stored in the offset account, maybe 5-10% of the value of the mortgage.
There are many mortgage products out there to choose from and off set mortgages are appealing because they can be truly flexible. The key is to carefully examine all offset mortgages available and make sure the deal is right for you in the long term.
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