Offset Mortgages Explained

Offset Mortgages Explained: How You Could Save Money

Red TapeIf you need to have offset mortgages explained, this guide could help you. Offset mortgages were introduced into the UK in 1997 by Virgin, an import from across the pond in Australia. The concept was simple: if you had savings and a mortgage, why not offset your savings against your mortgage and pay a reduced amount of interest? With offset mortgages explained the idea caught on with UK consumers and now there are about 30 providers offering offset mortgage deals in the UK. That represents about 10 per cent of UK mortgage providers, so it's a significant part of the mortgage market*.

With offset mortgages, explained Virgin, you would only pay interest on your actual debt. This principle was extended to cover current accounts and credit cards, with a number of offset mortgage providers allowing consumers to use the offset principle for credit card debt.

Providers of offset mortgages explained that there are two main types of mortgages using the offset principle. Current account mortgages effectively give mortgage holders a single account with a large overdraft. Savings, current accounts, credit cards and loans are rolled into a single account, with a single interest rate depending on the lender. This means there is only one payment to worry about.

In contrast, providers of offset mortgages explained that they allow consumers to keep their separate accounts but link them together. This means that offset mortgages are tax efficient because no interest is paid on savings, so therefore no tax is payable. With both types of accounts, mortgage holders get a borrowing limit (or facility). They can then borrow up to that amount without penalty.

The Right Mortgage For You ImageTo have the principle of offset mortgages explained, have a look at this example. John Smith has savings of £20,000 and a mortgage of £120,000. Mr Smith decides to take out an offset mortgage. Now, instead of paying the interest on £120,000, he pays the interest on £100,000. When he arranged the mortgage, Mr Smith asked for a borrowing limit of £140,000. This is because he is contributing £10,000 to his daughter's wedding next year. He will then have a debt of £130,000 but will pay interest on £110,000.

Savings And Offset Mortgages Explained

It is useful to have the financial benefits of offset mortgages explained fully. It is estimated that people who have large amounts of savings (such as £20,000) could save a small fortune in interest over the life of their offset mortgage. They are also likely to repay their mortgage early, some by as much as eight years**. This is because offset mortgages are also flexible. This means that people can overpay, underpay and take payment holidays depending on the terms of their particular offset mortgage deal. However it is important to remember underpayments and payment holidays could increase the mortgage term and/or the total amount payable.

Providers of offset mortgages explained that offset mortgage loans are also helpful for people who can't be sure that their income will be the same from month to month. Self-employed people, people who get annual dividends, employees on bonus schemes and salespeople on commission can all benefit from offset mortgages. Offset mortgages come in a variety of flavours, with base rate trackers being a popular option.

If you need to have offset mortgages explained further, then don't hesitate to call our professional mortgage partners on 0845 60 33 173. A specialist offset mortgage adviser will be able to help you choose the offset mortgage deal that is right for you.

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