The Offset Mortgage - Pros and Cons
How a Current Account Mortgage Can Reduce Mortgage Interest
Dec 12, 2008
An offset mortgage, also known as a current account mortgage, allows a borrower to offset their savings against their mortgage. This achieves a reduction in the amount of interest paid and can help reduce the mortgage term considerably.
Example of How an Offset Mortgage Works
Let's imagine that a borrower has a £150,000 mortgage and £25,000 in savings. An offset mortgage works by only charging the borrower interest on £125,000 and not £150,000. This means that the mortgage can be paid off many years earlier than would otherwise be possible.
Advantages of an Offset Mortgage
- Flexibility. It is possible to pay off a lump sum without penalty.
- Less total interest is paid. Although offset mortgages charge a higher rate of interest, the total interest paid is actually lower due to the reduced mortgage term.
- Helpful to the self employed. The ability to make repayments at different times can be of assistance to the self employed as income streams tend to come in less predictably.
Disadvantages of an Offset Mortgage
- Higher rate of interest. Flexibility comes at a price as most current account mortgages charge a higher rate of interest than base rate trackers, fixed rate and other mortgages.
- Variable interest rates. Most offset mortgages have variable interest rates. This can make budgeting difficult during periods when rates are rising.
- Low savings. Those that have low savings stand to gain very little which means that an offset mortgage is only really suitable for those with a decent level of savings. It can prove to be more costly for those with low savings due to the higher rate of interest charged.
- Regular switching of providers. Due to the fact that interest rates are less favourable, it will be necessary to change providers more often to take advantage of the most favourable deals.
Check the Small Print to Identify the Right Offset Mortgage
Always be prepared to look beyond the headline offset mortgage figures. Check the small print to identify potential early redemption fees, administration fees and exit fees. Look at the entire package to find the right current account mortgage product.
If a decent level of personal savings are available, an offset mortgage may be the right choice. It can reduce the mortgage term considerably, but a short term interest rate premium is paid for the flexibility provided.
Those who are interested in reading about offset mortgages may also wish to look at Fixed Rate Mortgages - Pros and Cons and Standard Variable Rate Mortgages - Pros and Cons.
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