If you own a home and have some savings, then an offset mortgage could make your savings work for you – and save you a lot of money. An offset account is one of a new kind of mortgage that offers flexibility to homeowners. Borrowers' minds are focused on whether now is the time to switch to a new mortgage. And as offset homeloans become steadily more popular, it could be time to weigh them up alongside all the fixed rates and trackers.
With an offset mortgage, you can use the balances in your current account or savings (and even your ISA – Individual Savings Account), to reduce the amount of interest you pay on your mortgage and even bad credit mortgage, or maximize the interest you earn on your savings.
Offset mortgages can offer the following benefit options for your choice:
• Shorter Term - the potential to pay off your mortgage early to gain greater financial freedom sooner
• Lower Payments - lowering your monthly mortgage payments to increase cash flow
• Reduced Debt - reducing the amount of interest paid over the term of your mortgage and bad credit mortgage and gradually lowering your mortgage balance over your chosen mortgage term.
There are two basic types of offset deal. The first offset mortgages launched in the UK were current account mortgages (CAMs), linking a homeowner's current account with the mortgage. Britannic Money's CAM was first, launched in 1997, followed closely by Virgin One, now called The One account run by Royal Bank of Scotland.
The second type of offset is where the deposits are kept in separate accounts or 'pots', but linked for the purposes of interest calculation. Providers include Barclays and Woolwich, Intelligent Finance (IF), Egg, First Direct, Newcastle building society, Northern Rock, Standard Life and Yorkshire building society. With these, as with CAMs, borrowers pay interest only on the mortgage, minus savings.
Remember that your savings won't earn any interest while they're offset, but because they don't earn interest, they're not subject to tax which makes the Offset mortgage tax efficient too.
Interest rates on offsets have traditionally been higher than those on normal home loans, partly because they are more expensive to administer. However, this "offset premium" has fallen recently, as more lenders enter the market and competition increases. As a result, offsets are becoming more appealing to ordinary borrowers and less restricted to niche markets such as self-employed professionals. As demand for offsets especially for offsetting bad credit mortgages grows, more lenders will feel they have to offer them. These new entrants will put further downward pressure on the interest-rate premium, creating a virtuous circle of improving competitiveness. Already there is hardly a premium on some deals.
Offset mortgages provide consumers with the ability to manage their own repayment structure by allowing overpayments and underpayments. If you are disciplined and manage the mortgage correctly, you could see your mortgage term decrease sooner. If you are undisciplined, you could face some unexpected financial problems. It is important to seek independent financial advice to make sure that this is the right mortgage for you.