What is an offset mortgage, how does it work, what are it’s benefits, who should consider using this type of arrangement, what are the risks involved? All is explained here – or you can watch our video on the right.

Offset mortgages reduce interest

Offset mortgages are an idea that came on to the UK market in the 1990s and were primarily imported from Australia. The concept of an offset mortgage is that you use the cash that is available day-to-day in your bank account to reduce the interest charged on your mortgage borrowing. Through this you can reduce the term and the total cost of your loan.

Offset mortgages – how they work

A borrower takes a mortgage loan in the usual way, against this the lender charges a rate of interest. That interest is charged daily on the amount of capital outstanding on the mortgage account.
The borrower sets up a bank account with the lender that is linked to the mortgage account. Funds then held in that bank account are offset against the outstanding mortgage amount daily before any interest charge is made.

For example, if you had a mortgage balance of two hundred thousand pounds and twenty thousand pounds in the bank account, you would be charged interest only on the difference between the two figures, or one hundred and eighty thousand pounds.

Your offset bank account can be used in the same way as your usual current account. The funds you have available to cover your monthly expenses could be offset against your mortgage. The net affect of this is a dramatic reduction in the term of your mortgage and therefore the total interest paid on the loan.

Offset mortgages – good for self employed and higher rate tax payers

Offset mortgages are particularly popular with self employed applicants who may need to keep funds aside to pay tax bills or invest in their business in the medium term. By keeping these funds offset against the mortgage you are getting the maximum benefit.
Rather than receiving interest on which you would pay income tax, you reduce the net interest charge on your mortgage at the gross rate.

Offset mortgages for flexibility

Another feature of the offset mortgage arrangement is its flexibility. You can overpay and underpay your mortgage as you wish. You can drawdown money you have already paid or take payment holidays. You can also reduce or increase your monthly payment as you wish.

Offset mortgages are generally not quite as competitive as the standard mortgage equivalent and therefore should only be considered if you are confident you will use the offset facility. Also you need to make sure that you do not allow repayment of the mortgage to drift by under-paying or taking payment holidays too often.

Overall offset mortgages are a great product, particularly for self-employed borrowers, employed borrowers with large bonus payments, and all higher rate tax payers.

We are waiting to assist you with your offset mortgage – contact us now to find out more.