There are lots of types of offset mortgages on offer, but all of them work on the same basic principle. Offset borrowers allow their savings to be offset against their mortgage debt to reduce the amount of interest charged on the mortgage loan. However, borrowers forgo any interest on their savings.
For example, with a mortgage of £100,000 and savings of £8,000, interest would only be charged on £92,000. You no longer earn interest on your savings, but save on mortgage interest.
Current Account Mortgages are another type of offset mortgage, which can count both your savings and your current account against the amount you have borrowed.
For example, with a £113,000 mortgage, £6,500 savings and an average current account balance of £1,500, a borrower will only pay interest on £105,000 of the mortgage instead of £113,000.
In addition, these products also offer flexible features, like the facility to overpay, underpay, take payment holidays or borrow money up to an agreed limit at the same rate as the mortgage rate.
The pros
By reducing the interest on your loan, you can reduce the length of your mortgage term. In the second example mentioned above, over 25 years the borrower would save £19,379 in mortgage interest and pay off the mortgage two years and six months earlier.
Another benefit applies to those products offering flexibility. If you overpay you will reduce your debt, but if you have a lean month or want to take a baby or travelling break, your mortgage can accommodate it. Paul Lloyd, head of products at The One account, identifies another benefit of CAMs. “A lot of the overpayment benefit comes from using any money left over in your account at the end of the month.”
The cons
Critics claim that to see any real benefit you need as much as 10 or 15 per cent of your mortgage in savings to counter the higher interest rates often charged on offsets and CAMS.
But while it is true that the higher the savings, the greater the benefit, there are deals with competitive rates. (Turn to page 70 for current deals.)
Peter Gladdy, director of broker Mortgages Direct, explains what he sees as another negative. “If you draw down immediately after the interest is calculated, this negates the effects of the savings.”
What offsets can achieve can actually be acccomplished by overpaying on a standard mortgage, Gladdy argues, as long as you know at what time the interest is calculated and overpay just before the date.
However, Murdo McHardy, senior manager, product development and marketing at Scottish Widows, says: “With a standard mortgage, if you want to borrow back a loan it may take time to reapply. With an offset that you have immediate access.”
Who they suit best
These products are best suited to people ‘willing to take ownership of their finances’, suggest specialists McHardy and Gladdy. Paul Lloyd, spokesman, The One Account, disagrees, saying you don’t have to be a financial genius to manage the account. “They suit anyone who has the enthusiasm to pay off more of their mortgage,” he says.
To get the maximum value from offsets and CAMs, however, you need a sound knowledge of how the product works, decide which features are priorities for you and then make sure you use them.
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