Offset
Mortgage
An offset
mortgage
pulls all of
your
finances
into a
single
account. So
it runs your
current
account,
mortgage,
savings and
personal
loan
accounts
together. On
a daily
basis, it
adds up all
of your
assets and
your
savings,
plus the
money in
your current
account, and
offsets them
against your
debts
(mortgage
and loans).
Say you have
a mortgage
of £100,000
and savings
of £10,000,
and you
typically
have a
balance of
£1,500 in
your current
account when
you get
paid.
Rather than
paying, say,
6% interest
on your
mortgage,
earning 3%
on your
savings and
0% on your
current
account, the
offset
calculates
that you
have debts
of £88,500,
and simply
charges you
interest on
that.
Pros and
Cons of
Offset
Mortgages
Because
rates for
mortgages
and loans
are higher
than savings
and current
account
rates, it
makes sense
to NOT PAY
the interest
on the
£11,500,
rather than
to earn the
interest on
it. And,
because you
are
effectively
regarded as
having
nothing in
your savings
account, you
don't pay
tax on it.
Offset
mortgages
keep your
money in
virtual
'pots', so
you can
still see
how much you
effectively
have in your
separate
accounts,
but it gets
your money
working as
hard as
possible for
you.
The main
drawback is
that offset
mortgages
can be quite
difficult to
get your
head around
initially.
The offset
mortgage UK
market is
growing,
with around
30 providers
of this
flexible
mortgage
loan. Offset
mortgages
work by
allowing you
to link
credit and
debt
accounts to
reduce the
interest
that you
pay*.
Most offset
mortgages
link savings
accounts to
mortgage
accounts.
This means
that if you
have some
savings,
these are
offset
against the
amount owed
on your
mortgage.
Interest is
charged only
on the
difference.
Over time,
this could
result in a
considerable
saving in
interest
paid.
Here's a
brief guide
to the inner
workings of
an offset
mortgage. UK
offset
mortgage
providers
may offer
deals like
this. If you
have £20,000
worth of
savings in a
savings
account and
a mortgage
of £100,000,
you can
apply for an
offset
mortgage UK
account and
pay interest
only on the
difference,
which is
£80,000.
Many offset
mortgage UK
offers also
allow you to
link credit
cards to
your current
account, or
to link
mortgages,
credit
cards,
savings and
loans
together.
Although all
the accounts
remain
separate and
can be
managed
separately,
offset
mortgage UK
account
holders
benefit from
the reduced
interest
payments.
Offset
mortgage UK
accounts are
different
from current
account
mortgages,
which offer
similar
flexibility.
However,
current
account
mortgage
holders have
only one
account with
a very large
overdraft
and manage
all their
borrowings
and credit
in one pot.
Unlike
offset
mortgage
accounts in
the UK,
current
account
mortgages
will not
allow
account
holders to
benefit from
tax relief
on an ISA,
for example,
as
everything
is rolled
into one.
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