Offsetting your mortgage
One of the cleverest developments in the mortgage industry over recent years is the idea of an Offset mortgage, whose fairly novel concept was designed to take into account someone’s entire financial situation and use it to save them money on their mortgage.
Whilst this sounds fine so far, this type of arrangement is more complicated than a conventional mortgage and, as a result, tends to not be well understood. However, with more and more lenders offering these types of mortgages, it is important to be clear on the facts before deciding if an Offset mortgage is right for you.
How do offset mortgages work?
The idea behind the offset mortgage is that any savings you may have been counted (or offset) against the value of your mortgage, and you then only pay interest on the balance. In other words, the lender will charge you less interest on your mortgage, depending on the amount of savings you have built up.
For example: Let’s say you owe £100,000 on your mortgage, and you have £20,000 in a savings account. In this scenario, the lender would calculate the difference of these two amounts and charge you interest on the balance, which in this example is £80,000.
The offset calculation is usually done on a daily basis, meaning that any money in the account, even if it is only there for a short time, would benefit you. A good way to take advantage of this would be to have your wages paid in at the beginning of the month, and then all your bills come out at the end of the month, which would again increase the savings you could make.
Usually, this type of mortgage would require you to have a separate account or accounts with that lender, and it would need to be electronically connected to the mortgage. This then allows the lender to easily make the necessary calculations, and it could potentially save a great deal of money simply by not having to pay as much interest.
Of course, you would still need to make a monthly payment for your mortgage, but the result could be that you repay your mortgage much earlier than the original term and can even be a very tax-efficient way of making your savings work harder.