Offset Mortgage Accounts

How Offset Mortgage Accounts Work For You

Offset mortgage accounts offer several benefits for thrifty homeowners. Offset mortgage accounts have been in the UK since Virgin launched the Virgin One mortgage offset account in 1997 in conjunction with the Royal Bank of Scotland*. The underlying principle of mortgage offset loans was simple - people who had a mortgage and who also had savings could offset their savings against their mortgage, saving hundreds of pounds in interest repayments.

Here's an example of how offset mortgage accounts work. If you have an outstanding mortgage of £110,000, with a standard mortgage your would normally pay interest on the whole amount. However, if you have savings of £20,000, offset mortgage accounts allow you to offset your savings against your borrowings and only pay interest on the remaining £90,000 of outstanding debt.

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Since their launch, offset mortgage accounts have become more sophisticated. Many of them now allow you to apply the mortgage offset principle to other credits and debts. For example, some mortgage offset loans let borrowers offset their current account balance against their credit card debt. This means that when their salary is paid in, they accrue less interest on the outstanding debt. Of course, it also means that they accrue more interest as they spend during the month. However, over time, offset mortgage accounts with this facility can be a real money saver.

The Right Mortgage For You ImageA key feature of mortgage offset accounts is that borrowers can pay for all their borrowings at the mortgage interest rate, which is generally substantially lower than the annual percentage rate (APR) on most consumer credit.

Offset Mortgage Accounts And Current Account Mortgages

Offset mortgage accounts have a lot in common with current account mortgages. Both types of mortgages are flexible in payment options. That means that offset mortgage accounts and current account mortgages may allow overpayment, underpayment, payment holidays and early repayment, subject to the terms and conditions of the particular offset mortgage or current account mortgage. However underpayments and payment holidays could increase the mortgage term and/or the total amount payable

There is, however, one significant difference between offset mortgage accounts and current account mortgages. Current account mortgages merge all of the mortgage holder's accounts. This means that the mortgage holder has a current account with a huge overdraft and access to credit facilities. In contrast, offset mortgage accounts keep all the accounts separate. This means that holders of offset mortgage accounts can eliminate tax on their linked savings accounts when there savings are equal to their house loan.

Holders of mortgage offset accounts do pay a price for all the flexibility offered. Interest rates for offset mortgage accounts are usually higher than for standard mortgages, and track the Bank of England base rate. However, there are now several offset mortgage providers, so it's worth shopping around.

Flexible mortgage offset accounts are a useful option for anyone whose income is variable or intermittent. People who earn commissions (such as sales people), company directors who earn dividends and self-employed people might all benefit from the flexibility of offset mortgage accounts.

The good news is that people with offset mortgages usually repay their mortgages considerably earlier than the national average, sometimes by as much as eight years**. This is because they are effectively overpaying every time they make a mortgage payment. This is just one of the many reasons why offset mortgage accounts are becoming so popular.

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