offset mortgages what are they?

By Chris Clare in Mortgages on March 2nd, 2008

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by Chris Clare

The aim of this feature is to explain what exactly offset mortgages are and how they can be the solution for potential borrowers. Hopefully it will show how best to manage your finances whilst at the same time reducing the amount of interest owing on your various loans.

Offset mortgages are quite complex mortgages and whilst a lot of lenders purport to offer a full offset mortgage you will realise that very few actually do offer such a product when you know exactly what they are suppose to offer within them.

Offset mortgages are also known as flexible mortgages. Essentially an offset mortgage just ensures that all monies held by a client are kept within the same institution so that any credit interest can be offset against any debit interest that can be accrued on borrowings.

Let us use a working example. Let’s say your mortgage is 100000 and you have credit card debts of 2000. At the same time you have savings of 20000. If, for example, you are paying 19% per year on the credit card bill, what an offset mortgage does is offset the interest on the credit card against the interest accrued on the savings. That is to say, that rather than pay 19% interest on the 2000 debt, the lender will charge you less interest on that but then give you a lesser rate of interest growth on your savings.

This basically means that the credit card is costing nothing in interest. At the same time, the mortgage is costing less. If you think of the remaining savings, you are basically paying interest on 18000 less than the total value of the mortgage.

One of two things can happen here. Either the amount you pay each month will be reduced, or, if you keep up your payments on your card and your mortgage, your debts will be reduced at a faster pace due to your savings being taken into account.

But what does this mean with regards to your savings? Well, they are still safe because it is only the interest that is made on them that is used to cover the interest that your debts generate, the savings themselves are not used to cover any of the debt interest.

You can even find lenders who will set up your offset mortgage in the style of a current account. Your salary paid in each month will therefore also be considered as money owned as opposed to owed and will help to offset the interest payable. You have the benefit of your wages then reducing the borrowing interest and ergo the borrowing costs.

Let us say your mortgage is for 100000, but you have no other debts and no other savings. You do have a monthly income of 2000 coming in to your current account. For the length of time that that 2000 or part thereof stays in your account, you can offset the interest of it against your mortgage interest debt. You can use the interest accrued on the money saved to reduce the amount payable on the debt every month. This may not sound like a huge saving, but if over time you use the salary earned to work for you to help out with the debt you know has to be paid off every month, over time you can make a considerable saving.

It is hard to say whether or not someone would actually benefit from a full offset mortgage as every one has different circumstances however if it is something that you are interested in get in touch with your mortgage advisor and ask them to explain it in more details and decide whether it is actually right for you.

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