Offset Mortgage Rates | How Paying More Can Help You To Pay Less

Offset mortgage rates may not always look their best compared to other mortgage deals, but they might improve your long term finances if you manage your offset mortgage correctly.

When Virgin introduced the UK's first offset mortgage nine years ago, offset mortgage rates were nothing to write home about. In fact, they were considerably higher than the rates offered by other lenders at the time. But if the offset mortgage rates were so unfavourable, why does the offset mortgage sector account for 10 per cent of the UK mortgage market?** The reason is simple. Offset mortgage rates can allow people to pay less interest on their mortgages and even end their mortgages early.

To get the best from offset mortgage rates, it is essential to have some savings. Many analysts recommend that, for best results, borrowers should have savings which are 10 to 20 per cent of the loan amount. They won't earn any interest on their savings, but they will save a lot on the mortgage offset deal. Here's how it works.

If a borrower has savings of £20,000 and a mortgage of £100,000, the borrower only pays interest on the actual debt of £80,000 at the standard offset mortgage rates. Credit balances on current accounts can also be offset against this debt, or with some lenders against credit card debt, with the same result. Interest on offset mortgage accounts is charged daily, so although offset mortgage rates can be slightly higher, people usually end up paying less interest, as less debit interest is accrued when they have credit balances in some accounts. All interest is charged at offset mortgage rates, which means that many people will pay significantly less interest on their credit card debt. The average annual percentage rate for UK credit card debt is around 16.1 per cent*.

When shopping around for the best offset mortgage rates, it's worth looking at the two types of flexible mortgages. Offset mortgages link all your accounts, but keep them separate, so although you won’t earn interest on your savings or on any funds added to your current account, you pay less interest on your loan. And as your credit balances are not actually earning interest, there’s no tax to pay on interest. In contrast, current account mortgages lump all your financial dealings into one account with a large borrowing limit. Again, all borrowing is charged at offset mortgage rates.

Competitive Offset Mortgage Rates

Although still slightly higher, offset mortgage rates have become more competitive with the rates on standard mortgages. There are abut 30 lenders in the market***, with a range of tracker, capped and discount offset mortgage rates. Most offset deals offer a lot of flexibility which will suit anyone on a variable income, such as someone who's self-employed, City workers on annual bonus schemes, salespeople on commission and the like. Offset mortgage deals allow overpayment, underpayment, payment holidays and early repayment. However underpayments and payment holidays could increase the mortgage term and/or the total amount payable

All of this flexibility means that in spite of the offset mortgage rates, borrowers with savings can end up repaying their mortgage early, some by as much as eight years****. They also end up paying less interest because of the offset principle. The offset mortgage market is thriving and many analysts predict that offset mortgages will be about 30 per cent of the market in the near future. That means a wider range of offset mortgage rates and deals for borrowers to choose from.

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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: Interactive Investor 4/4/07 - The average credit card annual percentage rate for purchases is around 16.1 per cent. **Source: Datamonitor 16/4/07, The Offset mortgage market currently occupies a 10% share of the total market. ***Source: Mortgage Strategy 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.