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offset mortgages-are they suited to you?

Mar 2, 2008
The aim of this feature is to explain what exactly offset mortgages are and how they can be the solution for potential borrowers. Hopefully it will show how best to manage your finances whilst at the same time reducing the amount of interest owing on your various loans.

Offset mortgages can be confusing as they are a fairly complicated creature. It is worthwhile taking the time to understand them, however, as many lenders will claim to offer fully offset mortgages and in actual fact, what they are offering is not strictly speaking fully offset. By reading on, you will be able in the future to identify the truly offset mortgage from a false one.

You may also hear offset mortgages referred to as flexible mortgages. In a nutshell. all of the clients money is held in one single institution so that interest on the credit can be cancelled out against interest on the debit that is accumulated on the money borrowed.

Say for example you have a 100,000 mortgage and you also have a credit card that you have 2,000 and some savings worth for example 20,000. What an offset mortgage essentially does is offset all your credit interest against all your debit interest. This means that if your credit card is costing you 19% per annum and you only owe 2,000 instead of getting any credit interest on your 20,000 the lender reduces the amount that they are charging you on your borrowings.

So in the example above the credit card would essentially be costing nothing and the mortgage would also be reduced for interest calculation sake by the remaining 18,000 which is not being used of the 20,000.

There are two immediate results of this system. You can either reduce what you are paying per month, or alternatively, by maintaining the current payments you are making on both your mortgage and credit card, you will have paid off your debts in a shorter time than first anticipated.

But what does this mean with regards to your savings? Well, they are still safe because it is only the interest that is made on them that is used to cover the interest that your debts generate, the savings themselves are not used to cover any of the debt interest.

Another factor which would be of benefit to you is the fact that some brokers will tailor your policy so that you can use it in the same way as a current account. This means that when your wages go into your account each month the interest on your debts is reduced and along with it your borrowing costs.

Let us say your mortgage is for 100000, but you have no other debts and no other savings. You do have a monthly income of 2000 coming in to your current account. For the length of time that that 2000 or part thereof stays in your account, you can offset the interest of it against your mortgage interest debt. You can use the interest accrued on the money saved to reduce the amount payable on the debt every month. This may not sound like a huge saving, but if over time you use the salary earned to work for you to help out with the debt you know has to be paid off every month, over time you can make a considerable saving.

As each individual has their own financial situation it will be up to yourself to assess whether obtaining a full offset mortgage would be the best option to suit your circumstances but if the answer is yes then my advise is to seek the assistance of a mortgage advisor who will be only happy to help.
About the Author
Mortgage Route gives assistance help and mortgage advice from fully trained mortgage brokers coupled with no obligation mortgage calculators and sourcing tools.
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