An offset mortgage is the ultimate flexible mortgage. It takes a bit of understanding, but those borrowers who have converted to offset mortgages are big fans, as they can offer the most efficient and easy way of managing your money.
How do offset mortgages work?
An offset mortgage pulls all of your finances into a single account. So it runs your current account, mortgage, savings and personal loan accounts together. On a daily basis, it adds up all of your assets and your savings, plus the money in your current account, and offsets them against your debts (mortgage and loans).
Say you have a mortgage of £100,000 and savings of £10,000, and you typically have a balance of £1,500 in your current account when you get paid. Rather than paying, say, 5% interest on your mortgage, earning 1% on your savings and 0% on your current account, the offset calculates that you have debts of £88,500, and simply charges you interest on that.
Pros and cons of offset mortgages
Because rates for mortgages and loans are higher than savings and current account rates, it makes sense to NOT PAY the interest on the £11,500, rather than to earn the interest on it. And, because you are effectively regarded as having nothing in your savings account, you don't pay tax on it.
Offset mortgages keep your money in virtual 'pots', so you can still see how much you effectively have in your separate accounts, but it gets your money working as hard as possible for you. The main drawback is that offset mortgages can be quite difficult to get your head around initially.
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