Offset mortgage is a major novelty in the financial market introduced about a decade ago. It has aroused lots of attention and the number of users has currently increased by more than 20 times. Known as a savings account mortgage, it is considered as one of the best ways to make your home a source of better investment because through it your mortgage is tied into your savings account. It means, the better your savings, the better the potential discount you will get on your mortgage. If you have a positive saving, it is offset against whatever balance you have on your mortgage.
According to this scheme, besides borrowing money from the mortgage lender, you also run savings or deposit accounts with them. Then you are charged interest on what you have borrowed less the balance in your savings and deposit accounts. For instance, if you have an offset mortgage of 50,000 UK pounds and has 10,000 pounds in their savings account you would only be charged interest on the difference, that is, 40,000 pounds. By reducing the interest that you pay, you could clear the mortgage in a far quicker timescale and have positive equity. Less interest means lower monthly mortgage payments as well.
Though you save on interest through the lower interest charge on your mortgage account, legally you have not received any interest. If you have not received interest you ca not be charged tax on the interest. Hence, the savings you make is tax-free. This means that offset mortgages are especially attractive for higher rate taxpayers who would otherwise have to pay about 40% of the interest they receive in tax. Flexibility can also be a major advantage. You can normally pay off capital without penalty, underpay and take payment holidays as long as you have made sufficient overpayments throughout the years.
However, you need to ensure that the tax saving you are making is not negated by higher interest charges because the lenders often charge a higher interest rate for the benefit of an offset mortgage. But owing to intense competition, the interest rates are falling and through research and comparison you will be able to locate a competitive lender. With the offset lenders vying for your business, they are ready to give concessions and discounts. Hence, most of the offers are different from one another. Among several such sops, there are offers of free property valuations, free legal work and inclusion of your current account in the offset calculation.
You will also be offered a low starting rate fixed for six or twelve months along with a tracker which is below the national base rate for six months with a lot of variations. The rate can also depend on what percentage of the house valuation you want to borrow. So, you can get a 5.1% if you are borrowing less than 50% of the property value, and if you want a 75% then you may have to pay around 6% as interest.
Additionally, to make it worthwhile, you need to have a decent amount of extra savings in the first place. This may be difficult, since many people are using their savings to be able to put a deposit down on their house. Once these savings have gone, it may become difficult to put money back into your savings account after meeting daily expenses. However, if you have enough money that you can use to go with an offset mortgage, then it is much better than a traditional mortgage.
There are also special discount mortgage offers for those who suffer from some financial difficulty. Based on the standard variable rate of the lenders, this scheme tracks national base rate, plus a certain percentage of up to two percent. It broadly follows the rate, going up and down according the base rate. So, when the base rate rises, the interest goes up, but when it falls, the lender is not actually bound to apply the full reduction.
If you find it difficult understand the complexities, the best way to apply is to ask advice from an independent broker available online. They will consider your needs and search the market for some comparative quotes to make sure you get the very best deal.
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