Offset Mortgages - What Are They and Who Are They for?
What is an offset mortgage?Offset mortgages allow borrowers to pay interest on only a portion of the total principal. This is done by crediting some of the borrower’s savings against the loan, with interest calculated from the difference. For example, a person with a £150,000 mortgage might credit £50,000 of their savings against the debt and though only pay interest on £100,000 of the loan. Since these savings are held against the mortgage rather than remaining in a savings account, they do not earn taxable interest. The amount of capital that may be set against the mortgage is normally fixed, but in some cases may be revalued periodically. Since interest is usually compounded daily, putting money in the credit account has an immediate benefit on interest payments, even if that money is only there for a short time. Furthermore, money can usually be withdrawn from the account at any time with no penalty. Whom do they benefit?Predictably, offset mortgages are most beneficial to people with large sums available to credit against the loan. For this reason, anyone expecting large lump-sum payments might be particularly attracted to them. Also, people in a high tax bracket are in a good position to benefit from the tax-free savings. On the other hand, anyone unlikely or unable to credit large amounts of money against the principal will normally be better served finding a cheaper rate on a conventional mortgage.Be sure to first compare the interest gains of a savings account versus the savings of the offset, but since the interest on savings is taxable, savings accounts need a higher interest rate in order to give the same benefit. If the mortgage saves more money than a savings account earns, and offset mortgage might be the right choice.
