Offset Bank Account

How You Can Save With An Offset Bank Account

Ten per cent of UK mortgage holders now have an offset bank account* and there are around 30 offset bank account providers**. All that has happened in the nearly ten years since Virgin launched the UK's first offset bank account in conjunction with the Royal Bank of Scotland***. Originally from Australia, the idea of an offset mortgage soon caught on, with people jumping at the chance to save money on their mortgage payments.

An offset bank account allows account holders to offset their debts against their credits. This means that when homeowners' salary is paid into their offset bank account, they pay less interest on their mortgage debt, and if they have savings, this is offset against their mortgage payments. An offset bank account may link current and mortgage accounts, savings and mortgage accounts, or combine current, savings, mortgage, credit card and loan accounts. With interest calculated daily, an offset bank account means that account holders are charged less interest when their credit balances are at their highest.

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Offset Mortgage Rates

The added attraction of this type of offset account is that the interest on your credit card is charged at the usually much lower mortgage interest rate. Mortgage interest relates to the rate charged by the lender. Although interest rates on individual mortgage packages can vary widely, the average rate is much lower than the average interest on a credit card, which is in the region of 15.5 per cent****.

The Right Mortgage For You ImageThe other key rate to consider is the equivalent annual rate on your savings. Although no interest is paid on the savings, the fact that you are offsetting at the mortgage rate gives an EAR that is similar to that rate (Equivalent Annual Rate). Some calculations even increase the rate, taking into account the tax that would usually have been paid by normal or higher rate taxpayers. Indeed, the ability to reduce the amount of tax paid is a major attraction of an offset bank account.

With so much competition in the offset bank account market, mortgage rates vary considerably. Whereas offset mortgage holders used to have to pay a premium for the flexibility offered by the accounts, this is not always the case. Indeed, some offset mortgage providers offer their offset bank account at similar or identical rates to their other mortgage offerings.

Offset Mortgage Savings

Aside from the benefits to taxpayers and savers, an offset bank account can help every mortgage holder with better money management. Offset mortgage holders usually overpay on their mortgages, because the interest component of their mortgage payment varies with the credit balances in their accounts. Add to that the flexibility of overpaying when finances are healthy and you find that people with an offset bank account can save tens of thousands of pounds in interest and often repay their mortgage early. Of course, this works best for people who save regularly and are disciplined about managing their money*****.

If you're looking for an offset bank account, you will find a range of enticing deals on the market. Don't be afraid to seek our professional advice - its free. Our specialist offset mortgage advisors will help you choose the right offset bank account for you.

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