offset mortgages-are they suited to you?
This article discusses what exactly an offset mortgage is and how it may be of benefit to particular borrowers. Furthermore how it might save people money by effectively managing their resources to best reduce the amount of money they pay in interest on their various borrowings.
Offset mortgages are quite complex mortgages and whilst a lot of lenders purport to offer a full offset mortgage you’ll realise that very few actually do offer such a product when you know exactly what they are suppose to offer within them.
Flexible mortgage is another term used to describe an offset mortgage. Basically the way in which this mortgage works is that all of a customers finances are handled by one institution and that any interest from the customers debts can be covered by the interest gained from his credit holdings.
Let us use a working example. Let’s say your mortgage is 100000 and you’ve credit card debts of 2000. At the same time you’ve savings of 20000. If, for example, you are paying 19% per year on the credit card bill, what an offset mortgage does is offset the interest on the credit card against the interest accrued on the savings. That is to state, that rather than pay 19% interest on the 2000 debt, the lender will charge you less interest on that but then give you a lesser rate of interest growth on your savings.
Therefore the credit card would then be costing you nothing basically. Not only that, but the interest that you accrue on the other 18000 of your savings is used to cover the interest that is being charged on your mortgage loan.
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’re making on both your mortgage and credit card, you will have paid off your debts in a shorter time than first anticipated.
This may it look like you’ve lost your savings, but that is not the case at all. All it means it that you’re not earning the interest you would have been on your savings, but are instead paying a lot less interest on your debts. Your savings are still intact, but are working for you in a different way. They’re not earning interest, but are instead lessening your mortgage and credit card debt.
You can even find lenders who will set up your offset mortgage in the style of a current account. Your salary paid in each month will therefore also be considered as money owned as opposed to owed and will help to offset the interest payable. You have the benefit of your wages then reducing the borrowing interest and ergo the borrowing costs.
Let us state 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 might not sound like a massive 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 each month, over time you can make a considerable saving.
It is hard to state whether or not someone would actually benefit from a full offset mortgage as every one has different circumstances however if it is something that you are interested in get in touch with your mortgage advisor and ask them to explain it in more details and decide whether it is actually right for you.
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