Offset Mortgages
Offset mortgages are a type of home loan where the borrower's savings and current account balances are linked to their mortgage. The savings held in the linked accounts are used to offset the mortgage balance, reducing the amount of interest charged on the mortgage. A family everyday offset mortgage on the other hand, is a specialized type of offset mortgage designed to help family members assist each other in purchasing a home.
How do offset mortgages work?
You may be wondering how does an offset mortgage work? Well, when taking out an offset mortgage your main bank account, or accounts, is combined with a mortgage account. This means that the more money you save, or the higher your regular income, the less mortgage interest you pay. Another advantage to offset mortgages is having accessible lending. Typically, the limit on the account will be the equity held in the property, and you can draw from the account up to the agreed limit. This will be established at the time when you set up your offset mortgage.
For example, if you have an offset mortgage of £300,000 but have a linked savings account containing £20,000, you will only pay interest on the £280,000 liability balance. You could also find an option that will provide you with the opportunity to pay off your mortgage faster by higher mortgage interest payments and essentially save money.
Interest on offset mortgages
Depending on the lender, interest is likely to be calculated every day. This means that each day you have savings in your account, the more reductions you receive in the cost of your mortgage lending and mortgage payments.
An offset mortgage is also a tax-efficient option for homebuyers who may have been liable to pay tax on savings deposits since these are considered monthly repayments against the overall balance rather than savings. Some offset mortgage lenders have the option to hold multiple accounts within the facility, which could include a current account, a savings account, and an ISA account, for example. Higher rate taxpayers that don't want to pay a higher rate of 40% on savings interest, can get access to cash for renovations and also, instead of earning interest, the savings offset some of the amount borrowed which reduces the amount of interest charged on your mortgage.
To calculate the interest due, the balances on all the accounts are included. Most offset mortgages offer a degree of flexibility with options to make additional installments, vary monthly payments values, take repayment holidays when needed, and adjust the capital repayments on your mortgage value as required.
