Off-Set Mortgages Overview

By: michael sterios

Offset mortgages are a type of flexible home loan product that allow borrowers to reduce the interest charged on their loan balance by offsetting the balance of any savings they have accumulated in a specified deposit account.

For example, an offset mortgage that has a balance of £350,000 could be offset against a deposit account that has a positive balance of £80,000. The interest that will be charged to the borrower will be calculated on the net balance of £270,000 instead of the full balance of £350,000.

This type of home loan product first rose to prominence in Australia and are sometimes referred to as Australian mortgages in the UK. The original aim of offset products was to help home owners pay off their mortgage sooner than they could with traditional products and to simplify their banking by rolling several different products into one.

There are several different types of offset mortgages. Although most offset products are basically the same, in that the balance of savings in a deposit account is offset against the balance of the home loan, some lenders structure their offset products in different ways.

One such way in which they are structured is to separate the various financial products included in the package. These products may include any combination of the home loan itself, current accounts, savings accounts, credit cards, and loans.

A different way in which they are structured is to combine the products into a single facility. These offset products are commonly referred to as a current account mortgages.

While the specific features of various offset mortgages differ, some of the common features include: the ability to offset the balance of the home loan and the balance of the deposit account; overpayments and underpayments; additional borrowing to an agreed upper limit; payment holidays; daily interest calculations; the ability to transfer the mortgage to another property; a choice between capital and interest or interest-only repayment types; a flexible term of the home loan - usually between 5 and 25 years.

Interest is not usually earned on the balance of the deposit account. Instead, it is offset against the mortgage balance in order to save interest. This can help reduce the income tax liability of the borrower because tax is normally charges on interest earned from a deposit account.

Despite all the benefits of offset mortgages, there are several disadvantages that must be considered. One such disadvantage is that a higher rate of interest is normally charged on this type of home loan than for standard mortgage products.

Another risk is that the borrower is not disciplined enough to continue reducing their loan balance and instead draw down on it whenever they wish to. Because equity can be drawn upon with little interference from the lender there is a risk that undisciplined borrowers may not pay off their mortgage early as intended. Borrowers should therefore be careful to not use the equity in their home as a bottomless savings account.

Borrowers should therefore carefully assess whether this type of product is right for them before applying. Unbiased advice should be sought from an independent broker if there is any doubt.

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