Offset Mortgages – Benefits

Offset Mortgages

Offset mortgages are a variation on current account mortgages. Originally devised in Australia...

Get a Free Quote Benefits of an Offset Mortgage

Offset mortgages suit many borrowers, in particular those with variable incomes, including the self-employed and those who earn bonuses or large amounts of commission. They can also work favourably for borrowers with cash savings in a bank or building society account.

Many self-employed people use offset mortgages as a method of saving in order to pay their annual tax bills. During the year, the money put aside for HM Revenue & Customs contributes to reducing the mortgage debt, until the payment date is reached when the tax bill is paid.

However, you do not have to be self-employed to benefit from an offset mortgage. Anybody who likes the idea of whittling away their mortgage over time and reducing the overall term (and total amount of interest paid) should give consideration to an offset mortgage.

Family Offset Mortgages
Some mortgage providers (e.g. Yorkshire Building Society, Newcastle Building Society) offer family offset mortgages, where parents, for example, can offset some (or all) of their savings against a child’s mortgage debt. Family offset mortgages also offer scope to reduce potential tax liabilities.

Offset Mortgages v Current Account Mortgages
Savings and debts are held in separate accounts for an offset mortgage, whereas for a current account mortgage (CAM) everything is held in a single account. For many borrowers, there is little to choose between the two options, other than the bad impression that a CAM might give of seeing the size of your ‘overdraft’ every time cash is withdrawn from a ‘hole in the wall’.

A CAM will only give one balance for all of the linked accounts. This can lead to difficulties in keeping track of the exact balances of all aspects of the current account mortgage. The danger is that the borrower becomes complacent about the substantial negative balance on the account and sees no difficulty in adding a further few hundred pounds to the overdraft to finance a purchase that cannot be afforded based purely on the income of the borrower.

However, it should be noted that with an offset mortgage, if a borrower has savings in a Cash ISA (Individual Savings Accounts), the savings can be offset against the mortgage without having to close the ISA and the ISA would still be retained after the mortgage has been paid off. This would not be possible with a CAM.

Summary
Bullet Point Offset mortgages are a useful way of using savings to offset against the value of the mortgage to reduce the interest payable on the mortgage;
Bullet Point for example, if the mortgage is for £200,000 and there are savings of £50,000, interest will only be payable on the £150,000 balance;
Bullet Point an offset mortgage is ideal for those who are self-employed and hold a savings account to deal with annual costs such a taxation or insurance premiums;
Bullet Point a current account mortgage is different from an offset mortgage because, with a CAM, only one balance is given, which can make keeping track of finances very difficult;
Bullet Point with an offset mortgage, separate balances are still available, allowing easier tracking of the real financial position.

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