Offset mortgages are a common type of mortgage loan in the UK; and have become a very popular way to pay off home loans early since their inception in the 1990s. This type of loan allows savings deposits to be credited against the mortgage loan. Sometimes called a flexible mortgage, the repayment plan allows flexibility in making monthly payments. There are several features that make the offset mortgage an attractive option for UK home buyers.
The key feature in this type of mortgage loan is the ability to reduce the interest charged on the loan by offsetting a credit balance against the amount owed on the loan. Interest is then only charged on the net amount of the loan. There are also some other great features of offset mortgages including:
- The ability to overpay: The buyer can pay more than the monthly amount due on the mortgage loan.
- Borrow back previous overpayment: When a home buyer pays more than what is due for the monthly mortgage note, they can borrow back the amount overpaid on the loan.
- Underpayment options: Offset mortgages are highly flexible in repayment schedules, even offering the borrower the opportunity to underpay on his loan at times.
- Suspend payments: There is also an option with an offset mortgage to temporarily suspend, or take a holiday, from making monthly mortgage notes. The time allowed for breaks in making payments is typically 3 to 12 months.
How it works
The concept of how an offset mortgage works is fairly simple. If a home buyer has a mortgage of £100,000 and £20,000 in a savings account applied to the mortgage; he would only pay interest on £80,000. The concept is to make the savings account work for the home owner and allow him to pay his mortgage off early.
Multiple offset accounts option
Some offset mortgage lenders will allow borrowers to access multiple accounts to offset the interest on their mortgages. An account holder with several accounts at the same bank may be able to link them all to his home mortgage and apply the interest earned to help pay down his mortgage balance. Not all lenders will allow multiple accounts to be used for offset mortgages, so it is best to check with the lender for their policy regarding offset mortgage accounts.
One of the great advantages of an offset mortgage is the ability for home owners to pay off their mortgages early. Applying savings interest to the balance owed on the mortgage, the buyer is able to use this money to pay down his mortgage debt. Offset mortgages are tax-efficient in that the saving account holders saves paying taxes on interest earned by applying the money to the mortgage loan. The beauty of the system is that the home buyer can always borrow this money back if needed. Some offset mortgages allow the borrower to link a savings account directly to the loan, while others have an account specific to the home mortgage. The ability to draw back money overpaid on an offset mortgage may also reduce the need to refinance or take out a second mortgage on a home.
Offset mortgages normally have a credit limit on the amount that can be borrowed back on overpayments. For undisciplined home owners, they are negated the advantages of applying the savings interest to their mortgage if they are constantly borrowing this money back. Lending limits are periodically reviewed for offset mortgages and the ability to borrow back may be restricted toward the end of the loan term.
Determining if an offset mortgage is the right option
For buyers who are looking for a flexible mortgage repayment plan, the offset mortgage offers many attractive options. For home owners who think they may have a problem using good judgment and restraint in the amount of money they borrow back; this may not be the best option. The offset mortgage is a good idea for paying a home mortgage off early if the buyer can control the temptation to borrow back too much off the money. Many UK home buyers have been able to pay off their homes very quickly using the option of an offset mortgage. With an offset mortgage, the borrower has more control over his payment options, and the time is takes to pay back the mortgage loan. If it is the right option, see the best offset mortgage lenders.