Is an Offset Mortgage Right for You?

How a Current Account Mortgage can Reduce Mortgage Repayments

Apr 15, 2009

An offset mortgage, also known as a current account mortgage, allows a homeowner to reduce interest payments, pay less tax and lower monthly repayments. Find out how.

The offset mortgage, also known as the current account mortgage, works by allowing homeowners with savings to offset these against the interest payments. Whilst no interest is earned on savings, it instead reduces the interest paid on the loan and means that people pay less tax for this reason. The benefits of an offset mortgage are lower mortgage repayments and greater flexibility.

How an Offset Mortgage Reduces Mortgage Repayments

Homeowners that choose an offset mortgage and have access to at least £30,000 of personal savings can reduce mortgage repayments. A current account mortgage means that a homeowner won't need to make interest payments on part of the home loan.

For example, Mr and Mrs Jenkins are currently paying 7% APR on a £200,000 mortgage over 20 years. They have £35,000 of personal savings that they'd like to use in conjunction with their current account mortgage. How will this benefit the Jenkins family?

Signing-up to an offset mortgage has enabled Mr and Mrs Jenkins to save £275.32 pcm.

Offset Mortgages Allow Homeowners to Pay Less Tax

Whilst the Jenkins family may no longer earn interest payments on their personal savings, they will pay less tax. They were previously earning interest on saving, paying income tax on their gross gains and using the net gains to make their mortgage payments. Given that they are higher-rate tax payers, the offset mortgage offers a far more efficient way to pay their loan each month.

An Offset Mortgage Offers Flexibility

A current account mortgage provides Mr and Mrs Jenkins with greater flexibility. In the event of emergencies, families have access to their personal savings. Whilst using their money for home improvements or a luxury holiday will increase mortgage repayments, this flexibility is very useful to many families.

For example, Mr Jenkins spends £5,000 on a second-hand car in order to get to work. Whilst this will increase payments on their offset mortgage up from £1297.90 pcm to £1337.23 pcm, it may have meant that they needed to take out a more costly personal loan with higher interest payments.

Who Isn't an Offset Mortgage Right for?

An offset mortgage would have been the wrong type of loan if the Jenkins family didn't have access to a bare minimum of £30,000 in personal savings. Most offset mortgages charge more interest to compensate for the flexible terms so it's important to have sufficient savings available before signing-up.

An offset mortgage isn't suitable for everyone. However, homeowners with access to personal savings will be able to reduce mortgage repayments and pay less tax. Try to use an online comparison service or broker to trawl the market for the best deal.

The copyright of the article Is an Offset Mortgage Right for You? in Home Mortgages is owned by Asa Ghaffar. Permission to republish Is an Offset Mortgage Right for You? in print or online must be granted by the author in writing.