How do offset mortgages work?
The basic idea of offset mortgages is that any money you have in credit is offset against the mortgage, which will reduce the amount of debt on which interest is calculated.
The pros of this kind of mortgage are:
-
If you have a decent amount of money in savings you really can save a lot of interest on the loan, pay it off quicker than usual and become mortgage-free far earlier than you might expect.
-
If you get bonuses or large lumps of money every now and then, you can put it straight into your mortgage without penalties.
-
If you run short of money quite regularly, you can draw on any of your mortgage that you have already paid.
-
If you are married or cohabiting, you can put both your salaries into the offset account.
-
If you can persuade them, your parents or another kind relative could 'rest' some of their savings in your account for a while to help you pay off the mortgage.
The cons of this kind of mortgage are:
-
The mortgage rate is usually not the most competitive.
-
Many other, non-offset mortgages are now thoroughly flexible and offer, for example, an easy way to overpay with a lower interest rate.
-
If you tend not to have much in the way of savings you will save very little interest over the term of the mortgage.
-
The temptation to constantly draw against your mortgage can be too much and you will end up never paying it off.
-
Few lenders offer this type of mortgage so there is comparatively little competition in the market.
-
Some people find the product too difficult or confusing to use properly....continues below
Where can I get an offset mortgage?
The main players in the offset market currently are Barclays, Woolwich, Intelligent Finance (IF), First Direct and Clydesdale. The Royal Bank of Scotland also offers the One Account, which is a current account mortgage like an offset mortgage in that it offsets your savings against your loan, but the whole thing is lumped into one single account. It is rather like having an enormous overdraft for a few years, which can be unnerving. However, psychologically, it can help you work harder to save and pay it all off.
Being disciplined
Ray Boulger, of mortgage brokers Charcol, says that offset mortgages are a "brilliant concept" in principle but that borrowers have to make sure that they can save enough from the offsetting to cover the higher interest rate. David Hollingworth of Bath-based advisers London & Country Mortgages says he sees numerous borrowers who initially believe they need an offset mortgage but they don't really need it. "A lot of the time they will be wrong, because they have no plans to use the flexibility," he says. "We generally find them standard mortgages that allow them to overpay if they want to, but at a lower rate."