Offset Mortgages – Are They Right For You?

Posted by Allison on 5 April 2009, 10:48

While you have probably now heard about offset mortgages, you might not realise exactly what they entail.  While there is currently a credit crunch going on in America and the UK, not to mention several other countries around the world, offset mortgages could still be the best product to go for in many situations, no matter where you live or what currency your country uses.

House prices around the world may currently be falling, and the housing market itself is in a state of flux, but regardless of what happens, those who have offset mortgages will still be paying off their mortgage earlier than many other people.

Most traditional mortgages are completely separate from all your other financial affairs.  In essence a mortgage is simply another type of loan.  You borrow the money over a fixed period, make monthly payments to start paying back the money (including interest), and at the end of the fixed period – which could be something like twenty five years – the original amount you borrowed plus a hefty amount of interest will have been paid back in full.  You will often find that the total amount of interest you will have paid effectively doubles the amount you borrowed originally.

So how do offset mortgages differ from traditional ones?

The answer lies in the fact that they are not really a stand alone product.  When you get an offset mortgage you are given an account which also allows you to keep savings and run a current account, which are both tied into the main mortgage as well.  The key to an offset mortgage is that you won't be earning any interest on your current account or savings aspects of the account.  This interest would be a lot lower than the amount you would be paying on your mortgage anyway.

Let's look at an example to see how this works.  Suppose you have a mortgage of £100,000.  You also have a current account balance that is £2,000 in credit, and a further £10,000 in savings.  Now a traditional mortgage would charge you interest on the £100,000 in capital every month, gradually reducing your balance every year until the whole amount owed is paid off.

An offset mortgage works rather differently.  That £100,000 capital would be offset by the amount of savings and cash you have in your accounts.  So instead of being charged interest on £100,000, you would be charged interest on £88,000 instead.

Not only does this mean your monthly payments can be a lot more competitive, it also results in a lot of people being able to pay off their mortgages a lot earlier than they would have done otherwise.  It's not hard to see the benefits once you realise how these accounts work.

So are they right for you?

Applying for this kind of mortgage does mean you will have to switch accounts to make it worth having.  So if you currently have savings in an account with another bank or building society, you will need to move them over to a savings account that is tied into your mortgage account.  Fortunately the providers of these mortgages make it as easy as possible to transfer everything over with the minimum of fuss, and they will also be on hand to solve any problems or issues you might have.

It's clear to see though that the model of how this works won't appeal to everyone.  If you don't have any savings with which to offset this kind of mortgage then it is not worth having, because this is how you get the benefits of this particular product.

So if you want one of these mortgages and you don't have savings, the first step would be to start building some up, and then consider getting one in perhaps a few years time. 

It's obvious that the idea of being able to pay off your mortgage several years earlier is what appeals to most people.  When all the calculations are made the fact that you aren't earning any interest on your savings generally means you will pay much the same on an offset mortgage as you would with a standard one, although it does obviously depend on your circumstances and how much savings you have.

It's clear that someone with a mortgage of £200,000 and savings of £5,000 is going to have a higher monthly payment than someone who has the same mortgage but savings of £50,000.  It's all relative, and that's why you should never jump straight into one of these products without considering all the options that apply in your particular situation first.

So will offset mortgages grow to become the most popular type of mortgage in Britain?  Only time will tell, and given the current credit crunch and falling house prices that could develop into something of a crisis, many people are not looking to swap mortgages at all.  There is also the possibility that a lot of people won't be in a position to do so at the moment; it all depends on how much debt people have and how much they owe.

Of course that is another attraction of these mortgages.  You can borrow slightly more than you actually need and use it to pay off your debts or perhaps do some essential work on your home.  In this sense an offset mortgage does give you some other options and is a lot more versatile than traditional mortgages.

If you have some savings then it's certainly worth considering this option.  Many websites which feature these products have calculators on them which allow you to play around with some figures and weigh up how these products could help you to lower your payments and your mortgage term, depending on the figures you enter.  It's well worth trying this before getting more information.  If you play your cards right and use your money in the right way, you might find that an offset mortgage is the best bet for you.