Offset Mortgage Explained

Offset Mortgage Explained
An offset mortgage basically uses the​ interest from your savings account against the​ interest charged on​ your mortgage .​
Usually your mortgage lender will link your mortgage and savings account into a​ single account,​ with the​ same financial institution .​
Each month,​ the​ amount you​ owe on​ your mortgage is​ reduced by the​ amount you​ have in​ your account,​ before working out the​ interest due on​ the​ mortgage .​
For example,​ if​ you​ had an​ offset mortgage of​ £100,​000 and you​ had savings in​ your offset account of​ £25,​000 you​ will only pay interest on​ £75,​000 .​
When your savings balance goes up,​ you​ pay less on​ your mortgage .​
If you​ continually keep your savings balance high,​ this could eventually result in​ your mortgage being paid of​ early .​
On the​ other hand,​ if​ your savings go down,​ you​ pay more on​ your mortgage .​
Your mortgage lender will plan with you​ the​ minimum amount you​ should leave in​ your account each month.
Offset mortgages are especially attractive for higher rate taxpayers who would otherwise be charged 40% tax on​ interest earnt on​ their savings .​
When the​ interest earnt on​ your savings is​ automatically used to​ offset your mortgage,​ you​ will not have to​ pay any tax on​ those saving .​
According to​ one major financial lender in​ the​ UK,​ they believe that 25% of​ existing mortgages holders would be better off with an​ offset mortgage.
Offset mortgages are also flexible without a​ penalty .​
You can make extra payments,​ under payments and have a​ break from payments as​ long as​ you​ have made sufficient overpayments over the​ years.
Not all offset mortgages are the​ same .​
The competition among lenders is​ increasing and as​ a​ consequence the​ borrower has more options to​ choose from .​
This can include: free property valuations and free legal work,​ using two nominated saving accounts to​ be offset,​ and additional borrowing facilities .​
Depending on​ your lender,​ the​ saving accounts of​ family members can be combined to​ offset against one person’s mortgage; this is​ a​ popular choice for parents who want to​ help their offspring purchase their first home.
There are some disadvantages to​ an​ offset mortgage .​
Most offset mortgages allow the​ borrower to​ have a​ credit limit; if​ you​ are not disciplined about paying this back,​ then at​ the​ end of​ your mortgage period,​ you​ could be left with a​ big loan to​ pay .​
Thus,​ it​ takes a​ lot of​ budgeting and self-control to​ ensure the​ current account mortgage works effectively .​
Interest rates are different for the​ current account,​ savings and mortgage,​ so you​ do not have the​ opportunity to​ save money at​ the​ Standard Variable Rate like you​ can do with a​ current account mortgage.
Offset mortgage originally started in​ Australia and are fairly new to​ the​ UK market,​ however they have quickly gained in​ popularity .​
Originally,​ mortgage lenders only targeted the​ wealthy but they have now widen the​ market for customers who are charged basic tax and have savings .​
As a​ rough guide,​ a​ basic taxpayer needs around £20,​000 in​ savings behind a​ £100,​000 mortgage to​ make the​ offset deal better than a​ traditional mortgage .​
For a​ higher rate taxpayer,​ the​ savings requirement is​ about £10,​000 although those figures will change as​ interest rates vary .​
If you​ are looking for a​ mortgage,​ an​ offset mortgage is​ something to​ seriously consider,​ particularly if​ you​ are a​ higher rate taxpayer and/or have substantial savings to​ offset .​
While the​ basic concept of​ an​ offset mortgage is​ simple,​ it​ does get complicated .​
This clearly underlines the​ need to​ talk things through with a​ mortgage advisor .​
It is​ their job and responsibility to​ ensure you​ get the​ right type of​ mortgage and the​ best deal.

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