Offset Accounts - Are They Your New Flexible Friends?

If you need a flexible mortgage, then it's worth checking out the range of offset accounts. Imported from Australia*, offset accounts have been in the UK since 1997. Back then, the Virgin One offset account (launched with the Royal Bank of Scotland) was the only such account in town, but they soon caught on and now there are around 30 providers of offset accounts**. Offset mortgages also account for about ten per cent of the UK mortgage market***.

Here's how offset accounts work. As the name suggests, offset accounts allow account holders to offset credit balances against their debts. This can be both in mortgage accounts and credit cards. With an offset mortgage, people who have savings can offset these against their mortgage loan, so that they pay less interest. For example, someone who has an outstanding offset mortgage of £120,000 and savings of £30,000 would only pay mortgage interest on the actual amount of their debt, which is £90,000.

Some offset accounts allow the same flexibility with credit card debt. People with offset accounts can pay their salary into the account and accrue interest only on the debt. For example, if your salary of £1,000 is paid into your offset account at the start of the month and your credit card debt is also £1,000, on that day you would not accrue interest on the debt. As the month proceeds, you would accrue daily interest on the overall amount of debt, till you wipe it out again the following month.

In the mortgage market, there are two main types of offset accounts. These are offset mortgage accounts and current account mortgages. Current account mortgages work like a current account with a large overdraft. All your finances are in one pot and you have a borrowing limit on the account, which you must not exceed. With offset accounts the money you save on the mortgage payments might be worth while.

The other type of offset account is the offset mortgage account. With offset accounts of this type your money stays in separate but linked financial pots. You won't earn any interest on your savings, but you'll pay less in mortgage interest and credit card interest.

Mortgage Offset Savings

An additional benefit of offset accounts relates to credit cards. The average annual percentage rate on credit cards is around the 16 per cent level. With offset accounts all interest on debt is charged at the considerably lower mortgage interest rate****. Although rates for these accounts can vary widely, that is still a considerable saving for the mortgage holder.

The great benefit for holders of offset accounts is their flexibility when it comes to paying. Offset mortgage holders can overpay, underpay, take payment holidays and repay early, usually without penalty. It's worth shopping around for the most flexible offset mortgage deals so you can join the many offset mortgage holders who have repaid their mortgages five years early. That's because the interest component on your monthly repayment varies, so with most offset accounts, you overpay each month. However underpayments and payment holidays could increase the mortgage term and/or the total amount payable.

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© 2007 and 2008 Offset Mortgage Centre | Terms and Conditions | Privacy Statement | We don’t normally charge a fee for admistration of an offset mortgage. However, should a fee be charged it will typically be £495, only payable if you complete on your mortgage. | <strong>Your home may be repossessed if you do not keep up repayments on your mortgage.</strong> *Source - Mortgage Strategy 4/07: First arrived in the UK in the mid-1990's from Australia. **Source - Mortgage Strategy April 2007: There are now around 30 offset providers. ***Source: Datamonitor 16/4/07, The Offset mortgage market currently occupies a 10% share of the total market. ****Source: Interactive Investor. The average credit card annual percentage rate is around 16.1 per cent.