One of the ways that you can truly make your home an investment is to take out whats known as an offset mortgage. These are a type of flexible home loan product that allow borrowers to reduce the interest charged on their loan balance by offsetting the balance of any savings they have accumulated in a specified deposit account.
This is also known as a savings account mortgage. Interest is not usually earned on the balance of the deposit account. Instead, it is offset against the mortgage balance in order to save interest. Although this means that you dont gain any interest on whatever savings you have, you also dont pay any interest on the corresponding amount on your mortgage. By reducing the interest that you pay, you could clear the mortgage in a far quicker timescale and have positive equity. This can also help reduce the income tax liability of the borrower because tax is normally charges on interest earned from a deposit account.
An offset mortgage could be the right mortgage choice for you, if you are good with your finances, generally have a high current account balance, have reasonably high savings and you are a taxpayer, particularly a higher rate taxpayer. Hence, an increasing number of financial lenders are offering offset mortgages because of the benefits they offer to the customer.
With offset mortgages, your mortgage account runs alongside all your other accounts, and the net balance for all the accounts is calculated, normally on a daily basis. The interest is then worked out on the overall total you have in your accounts. All the interest you have earned from your savings and current accounts goes straight into your mortgage account.
Less interest means lower monthly mortgage payments as well and a flexible term of the home loan usually between 5 and 25 years. Other favorable features include overpayments and underpayments; additional borrowing to an agreed upper limit; payment holidays; daily interest calculations; the ability to transfer the mortgage to another property; a choice between capital and interest or interest-only repayment types.
However, a higher rate of interest is normally charged on this type of home loan than for standard mortgage products. If you tend to keep a low balance in your current account and have little in the way of savings, the benefits you get from combining the accounts may be too small to outweigh the extra cost of the offset mortgage. You also need to be efficient with keeping track of your financial outgoings. Borrowers should therefore carefully assess whether this type of product is right for them before applying. Unbiased advice should be sought from an independent broker if there is any doubt.
As with most mortgages there are variations around this theme, such as a current account mortgage. Your salary is paid directly into your mortgage account where it immediately reduces your mortgage balance. You can then draw against the account for your normal spending as you would with an ordinary account. The mortgage balance and interest is calculated daily, so even if money were left in your account for a short period, it would still have some positive impact on the cost of your mortgage.
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