Offsetting your Mortgage

By: Liam G

Offset mortgages, which were practically unheard of around six years ago, are becoming an increasingly popular option within today's market.

They are particularly popular with higher-rate taxpayers and are expected to become more and more common, with lenders saying that 25% of current mortgage holders would be much better off with an offset mortgage.

The basic principle behind offset mortgages is that we tend to pay more interest on debts than we accumulate on savings. Therefore, by linking the two accounts - and even a current account into which your salary is paid - the amount you are in credit by helps to offset the capital owed on the mortgage. In turn, this reduces the interest payable on what you owe.

For instance, if you had an offset mortgage of ?100,000 with a savings account of ?10,000 and ?2,000 in your current account, you would only accrue interest on ?88,000 of the mortgage.

Another major advantage with offset mortgages is that the interest saved is not taxed. For instance, instead of getting a net return of 3% on your savings, by offsetting you can expect a net return of 6%

One of the main disadvantages of offset mortgages was the high interest rates attached to them. Such interest rates were often at least 1% or more higher than the most competitive fixed rate mortgage within the market at the time.

As offset mortgages have become more popular though, introductory rates of less than 5% are becoming more and more common.

As to be expected, the highly competitive nature of the lending market has led to banks offering various extras to increase customer base.

The most popular of these include free valuations, legal fees and some lenders even allow you to offset 2 savings accounts. On top of this most lenders offer "super low" introductory interest rates, usually for 6 - 12 months.

The actual interest rate you will end up with will depend on a number of factors, notably the percentage of the properties value that you wish to borrow.

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