How To Choose The Best Offset Mortgage Deals For You

How To Choose Offset Mortgage Deals

Offset mortgage deals seem to be everywhere at the moment. That's no surprise, since there are now 30 providers of offset mortgages and offset mortgage deals account for about 10 per cent of the UK mortgage market. Financial analysts confidently expect offset mortgage deals to be 30 per cent of the market within a few years*.

There are generally two types of offset mortgage deals. Current account mortgages create a huge financial pot which is like a current account with a large overdraft. With this type of offset mortgage deal, borrowers have a drawdown limit and keep all their finances together. Other offset mortgage deals are different, with all the borrowers' finances remaining in separate but linked accounts.

Apart from that difference, offset mortgage deals tend to work the same way. As the word 'offset' suggests, offset mortgage deals allow borrowers to balance their credit balances (in savings accounts and current accounts) against their debts (in mortgage accounts and sometimes with credit cards) and only pay interest on the overall debt.

When choosing offset mortgage deals there are several areas that potential borrowers should look at. The loan to value is a key feature. This is the amount of money that you are allowed to borrow for an offset mortgageas a percentage of the property value. If the property you want to buy is worth £100,000 and your offset mortgage provider allows a 90 per cent loan to value then you can borrow £90,000.

Charges For Offset Mortgages

Look out for higher lending charges with offset mortgage deals. As with other mortgages, offset mortgage providers will usually charge an additional fee for those borrowing over a certain percentage of the property value. This is used to insure themselves against the risk that you might not pay. Another fee too look out for with offset mortgage deals is the arrangement fee. Some offset mortgages have them and some don't, so it's worth examining the whole offset mortgage package before signing on the dotted line.

Since offset mortgages are flexible, they do not usually have early repayment charges, but don't take this for granted. Some offset mortgage deals may charge borrowers if they repay the mortgage within the initial preferential rate period. Other flexible features include the ability to overpay, underpay and take payment holidays, but there are often conditions. For example, many offset mortgage deals prohibit underpayment without a previous overpayment. However underpayments and payment holidays could increase the mortgage term and/or the total amount payable.

The mortgage rate is perhaps the most crucial factor for people who are looking for offset mortgage deals. Although some offset mortgages have higher interest rates than standard mortgages, there are many offset mortgage providers who do not increase the rate for these products. Effectively a client is earning the equivalent of the mortgage rate in their savings by offsetting. It's also worth considering the equivalent annual rate (EAR) for savings. This shows how much offset mortgage holders earn on their savings by giving up the interest in favour of offsetting.

A key advantage of offset mortgage deals is that borrowers usually pay less interest overall and repay their mortgages considerably earlier than people on standard deals. Offset mortgage holders could shave as much as eight years and eight months off the term of their mortgage**. According to analysts, the people who get the best from offset mortgage deals are those with savings equivalent to 10 to 20 per cent of the loan amount. If this is you, then browse around the offset mortgage deals to see if there is one that is right for your circumstances.

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© 2007 and 2008 Offset Mortgage Centre | Terms and Conditions | Privacy Statement | We don't charge a fee for admistration of an offset mortgage. The Offset Mortgage Centre is the trading name of The Mortgage Broker Ltd, (a whole of market mortgage broker), which is an appointed representative of Home of Choice Limited, which is authorised and regulated by the Financial Services Authority | Your home may be repossessed if you do not keep up repayments on your mortgage. *Source: Mortgage Strategey Supplement - April 2007. **Source Barclays Bank: Calculation based on an offset tracker product; repayment mortgage of £100,000 over a 25-year term that has been offset with £20,000 savings, resulting in a reduction in mortgage term of 8 years and 8 months or a saving of £44,867 in overall interest. Calculation assumes balance remains constant throughout the life of the mortgage and that the mortgage loan and savings balance will vary. Outcomes will be either a reduction in payments or a reduction in mortgage term. No interest is paid on balances offset against the mortgage.