Offset Mortgage Deals

How To Choose Offset Mortgage Deals

Offset mortgage deals seem to be everywhere at the moment. That's no surprise, since there are plenty of offset mortgages and flexible offset mortgage deals account for about 10% of the UK mortgage market. There are generally two types of offset mortgage deals. Current account mortgages create a huge financial pot, 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 work differently, with all the borrowers' finances remaining in separate but linked accounts. Both work on the same basic principle though - the more you invest, the cheaper they become.

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, only paying interest on the overall debt.

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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 mortgage as a percentage of the property value. If the property you want to buy is worth £100,000 and your offset mortgage provider allows a 75% loan to value then you can borrow £75,000, for example.

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 to 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. But they only pay less interest on offset mortgages deals if they are the right deals - the wrong choice may become a stressful financial burden. The only way to be sure which offset is right is by talking to a mortgage professional.

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