Offset Bank Accounts

How Offset Bank Accounts Work

Offset bank accounts took the UK by storm in 1997 when Virgin and the Royal Bank of Scotland launched the Virgin One offset mortgage account*. It was simple - people who had both savings and a mortgage could offset their savings against their mortgage. What was more, they could save hundreds, if not thousands of pounds in interest****. With that incentive, offset bank accounts took off and now account for about 10 per cent of the UK mortgage market**.

If you are considering an offset mortgage, the first question to ask is whether you have any savings. An example of how offset bank accounts work will show you why. If you are a thrifty type, you might have £15,000 of savings stashed away, earning a bit of interest but otherwise doing nothing. With offset bank accounts, these savings work for you. If your offset mortgage deal gives you a mortgage of £100,000, you only pay interest on your actual debt of £85,000. Your savings are offset against your debt, hence the term offset mortgage.

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Many offset bank accounts also allow you to use the mortgage offset principle to deal with credit card debt. If your salary goes into your current account, this amount can be offset against any credit card debt, so you pay less interest. What is more, with offset bank accounts, the interest you pay on your credit card debt is usually charged at the much lower mortgage interest rate. While mortgage interest rates vary widely, almost any offset bank account rate will be better than the average credit card interest rate, which hovers around the 16.1 per cent mark.

The Right Mortgage For You ImageWith offset bank accounts, you can have different accounts for mortgage, savings, credit cards and other loans. This means you can get tax relief on your savings, unlike the other kind of flexible mortgage account, the current account mortgage. Unlike offset bank accounts, current account mortgages effectively give you a huge overdraft with all your money in one financial pot.

Flexible Offset Bank Accounts

Both types of account are flexible, so with offset bank accounts you can overpay and underpay on your mortgage. You can also take payment holidays if you have already overpaid and can repay lump sums each year without penalty. All offset bank accounts have slightly different terms, so it is worth reading the fine print carefully so see how you can make the best use of your offset bank account. However underpayments and payment holidays could increase the mortgage term and/or the total amount payable.

Offset bank accounts often offer tracker mortgages, pegged to the Bank of England's base rate. The rate you pay might be slightly higher than for a standard mortgage, but that's the price of the increased flexibility.

More and more people are choosing offset bank accounts and there are now about 30 providers in the market. Many people with offset bank accounts repay their mortgages early, some by as much as eight years, and they still have their savings when the mortgage is repaid****. So if you're a saver with a mortgage, it's worth looking into the options for offset bank accounts.

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