The Offset Mortgage Concept
The idea is very straightforward.
If you have a current/and or savings account with the
lender you can choose not to receive interest on this
money and instead pay no interest on an equal amount
of your mortgage. By keeping your mortgage payments
the same you will pay your mortgage off early and save
thousands of pounds. In other words your savings are
offset against your mortgage.
Example Of An Offset
Mortgage
| Mortgage |
Savings Balance |
Amount Saved |
No. Of Years/Months
Paid Off Early |
|
50,000 |
5,000 |
9,683 |
2 Years 9 Months |
| 50,000
|
10,000 |
16,898 |
4 years
10 Months |
| 100,000 |
5,000 |
10,419 |
1 Year
11 Months |
| 100,000 |
10,000 |
19,359 |
2 Years
9 Months |
| |
|
|
|
| Provided interest rates remain current. |
For borrowers who have both savings and a mortgage
this is therefore an excellent idea.
History Of The Offset Mortgage
The offset mortgage evolved out of the Flexible
Mortgage with its daily interest rate and the ability
to overpay to reduce the mortgage term. It has taken
it a stage further by linking in both bank and savings
accounts but maintaining the concept of paying off your
mortgage early.
There are obviously considerable advantages for borrowers
who want to have the solidity of access to their savings
and don't want to constantly chase the best interest
rates on their mortgage and savings.
Disadvantages of Offset Mortgages
Like everything in life, offset mortgages have disadvantages.
Headline mortgage rates look attractive, but the initial
rates soon revert to a higher rate. The average offset
rate is 1% higher than can be obtained by chasing the
cheapest mortgage rate. Not surprisingly the traditional
banks offer the highest rates, with Natwest and the
Yorkshire Bank, Direct Line having interest rates at
over 5%.
Offset mortgages are not generally taken out because
of their interest rates, but borrowers should be aware
of the difference in interest rates, both now and historically.
Intelligent Finance, Standard Life and The Woolwich
all have excellent track records in regard to their
offset mortgage rates.
A further problem with offset mortgages is that you
have all your eggs in one basket. When a couple of Canadian
banks did this concept way ahead of its time at the
end of the 80's/early 90's, customers found that it
was the mortgage that got paid first, irrespective of
instructions.
It is also, with a bit of leg work possible to have
a lower mortgage rate and higher savings rate.
Offset Mortgage Summary
There is no doubt that for borrowers with savings
and a good current account surplus that these are ideal.
It is important to have a lender with a good track record
of interest rates on their offset mortgages, and see
past gimmicks. One lender for example increases the
mortgage payments each year and quotes an unreasonable
balance remaining in your current account to have a
dramatic impact.
Contact us for more information
on offset mortgages.
Endowment Shortfalls and Offset Mortgages
Offset mortgages are an excellent way to compensate
for a possible endowment shortfall. Nobody is certain
what the future holds, and some sensational journalism
is painting a doom and gloom picture. Many of these
journalists were forecasting massive interest hikes
only a few months ago. Mortgage interest rates are relatively
easy to predict, but the equity market is not, and endowment
performance relies heavily on this. There is no certainty
of shortfalls nor surplus, the equity market is often
driven by sentiment rather than logic.
The traditional solution to a PEP or endowment possible
shortfall is to overpay on the mortgage and create a
part repayment, part endowment mortgage, but a good
alternative is to have an offset mortgage. An equivalent
amount to the extra payment needed to compensate can
be paid into your savings account and offset against
the mortgage. If the market changes and the shortfall
problems is eradicated then you have easily accessible
savings.
YOUR
HOME MAY BE REPOSSESSED IF YOU DO NOT
KEEP UP REPAYMENTS ON YOUR MORTGAGE.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST
YOUR HOME
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