OFFSET TYPE MORTGAGES

Offset Mortgages

With an offset mortgage your current bank account and/or any savings accounts are linked to your mortgage, so that the balance of these accounts reduces the amount you currently owe to your lender when your interest payment for the month is calculated.

In other words the more you have in your bank accounts then the less interest you have to pay.

For example if you have an interest only mortgage of £200,000 and have savings of £20,000 in your offset banking accounts then you will only pay interest on £180,000.

If you continue to have good balances in these accounts then this will help pay of your mortgage loan cheaper and quicker. If you have large savings then you would gain a great advantage by selecting this type of mortgage.

Anyone who has a more dynamic income with peaks and troughs is going to be attracted to an offset mortgage, such as the self-employed or a contract worker who may be paid occasional large bonuses.

This type of mortgage means you avoid paying tax on any interest that your account balances would have earned as the balances go straight to offsetting your mortgage. This should be of great interest to higher rate taxpayers.

Current Account Mortgages

A current account mortgage (CAM) is very similar to an offset mortgage loan as it still offsets the balance of your savings against what you owe to your lender.

The difference is that your mortgage and bank accounts are no longer separate, but combined into a single account that has a very large overdraft. The overdraft is what you currently owe on your mortgage. You only pay interest on the overdraft and this is calculated daily.

For example if you originally arranged a home loan mortgage of £100,000 and there is £7,000 in your bank account, your overdrawn balance will be £93,000 and this will appear on single statement from your lender.

As part of the deal with your lender you will have to agree to a schedule, which will dictate a minimum balance in your account each month. If you stick to the schedule then you will repay your loan by the end of the mortgage term. If the balance is low then it may take you longer and it will eventually cost you more to pay off your mortgage. If the balance is higher then you will pay less interest and may pay off your CAM mortgage earlier.

It may also be possible to add other loans and credit card balances into the overdraft, which would mean that they would be paid off at a cheaper rate.

If you don’t having savings or don’t anticipate having savings then both of the above types of offset mortgages are probably not for you, especially since this type of mortgage is more likely to have a higher interest rate than may be available to you from a different type of deal.

Also if you take out an offset mortgage you may find that your lender may require you to pay your salary directly into the account each month.