Offset Mortgages

An Offset mortgage is a mortgage that represents one of the largest mortgage innovations that has happened in these later years. You would not have seen many of these types of mortgages available six years ago. These mortgages are very similar to a current account mortgage and nowadays, they are both responsible for £10 out of each £100 of new-found lending.

As well as this, the main UK mortgage lenders say that 25% of the existing mortgage loan holders would actually be better off obtaining an offset mortgage.

The basic principle of the offset mortgages is that apart from borrowing funds from a mortgage lender, the borrower could also obtain a savings/deposit account with the lender. They will then be charged interest not just on what they have borrowed from the loan but also on what they have borrowed deducting the amount in their savings/deposit accounts. Therefore, if they obtained an offset mortgage of about £100,000 and they had £30,000 in their savings account; the interest that would be charged would just be on the difference, £70,000. In other words there will not be any interest paid on the borrowers’ savings, it would simply be offset.

The benefit of these mortgages is that as the borrower receives the maximum benefit on their savings by having a lower charge of interest on their mortgage account, they legally would not have received any interest. Due to this factor, they will not have to pay tax on this interest!!

These mortgages are therefore very attractive to the higher rate taxpayers as they would otherwise have to pay tax on 40% of the interest that they receive.

The advantage of an offset mortgage is that if the borrower has a £100,000 mortgage and they are paying a good interest rate of 4.69% and they used a deposit of £20,000 over a normal 25 year term mortgage, without the offset mortgage they would be paying about £85,351 in just interest. However with an offset mortgage they would only be paying £41,998 in interest. This is a total saving of £43,353. Alongside this, they could actually repay the mortgage around five years early. This is because the repayment amounts monthly are solely based upon the whole mortgage debt before any offsetting is considered so the borrower is are in fact overpaying their mortgage debt each month.

This means that a general tax payer will save around £9,538 in tax over the period whereas a higher rate one will save £17,341 in tax.

The flexibility of these mortgages is also another large advantage. The borrower can typically repay the capital of their mortgage without incurring any penalty charges as well being able to underpay it and also take a payment holiday as long as they have made enough overpayments over the years.

In the past a borrower has had to disburse a high rate of interest for the benefit of having an offset mortgage. Nowadays, because these mortgages are becoming more and more popular, the offset rates of interest are now actually falling.

The borrower needs to compare each method to make sure that the evident tax savings that they could make will not be eliminated by the slightly higher charge of interest. As this is not a very easy calculation, it would probably be better for them to leave this to their mortgage adviser to work out.

Because of the increase in competition for these mortgages, a lot of the lenders actually offer more benefits. Some offer free valuations on the property as well as free legal services. A few banks will actually include the borrowers’ current account balance within the offset calculation, whereas other lenders will enable two of the borrowers given savings accounts to actually be offset. Other lenders will even give an extra borrowing facility that includes a cheque book which could be used at all times.

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Because these types of mortgage can get very complicated, all mortgage lenders will actually require the borrower to obtain an independent mortgage adviser. It will be the advisers’ job to actually make sure that the borrower obtains the best type of mortgage for them as well as the best deal. After all as the competition is so high, they will not want to lose a potential customer so they will try their hardest to search the market for the best deals around.