Offset Mortgages Explained

An offset mortgage allows a homeowner to reduce the interest on their mortgage by offsetting credit that is held in savings or current accounts against the total mortgage debt.

For example, if the homeowner has a mortgage of £150,000 and savings of £50,000, then they would pay interest on only £100,000.

Advantages of an Offset Mortgage

• Offset mortgages are a good idea for those who can save large amounts of money as it reduces their mortgage repayments.

• Savings normally attract some kind of tax penalty, but if your savings are being used to offset a mortgage then you will not pay any tax on your savings.

• The interest rate payable on a mortgage is normally far higher than what your savings will earn in a current account. For example, the rate of interest your savings will earn in a current account may only be 1%, compared to the interest on your mortgage, which may be 6%. It's a far more efficient to use the money in your savings to pay off the mortgage than it is to leave it in a low interest paying account.

Disadvantages of an Offset Mortgage

• Because this is a relatively new type of mortgage you may find that not as many lenders currently provide this service. The limited amount of lenders currently offering offset mortgages means that there isn't a great deal of choice in the market place.

• Offset mortgages are suited to those requires a certain amount of discipline, as the temptation is always there to dip into the savings pot. If you give in to this temptation and splash out on extravagant items then you will no longer have any credit left to offset your mortgage against. This will leave you with an uncompetitive mortgage rate.

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Source: http://www.articlealley.com/article_484346_19.html

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