What is an off-set mortgage?
Many people do not know the concept of an offset mortgage. In simple terms the interest from a savings or cheque account is used to offset the interest being paid on your mortgage. Usually, this occurs when the mortgage and the savings account are with the same financial institution making it possible to link the two accounts into one. Each month, the amount you have in your savings account is to reduce or offset your mortgage amount. You are then charged interest on this reduced amount, therefore lowering the interest you pay on your mortgage.
How does an offset mortgage work?
For example, say you have a savings of 25,000 pounds in your offset savings account, and the offset mortgage is 100,000 pounds; then you end up with an offset liability of 75,000 pounds. You then pay interest on this lower amount of 75,000 pounds. So when the balance goes up in your offset savings account, you end up paying a lesser interest amount on your offset mortgage. Naturally, if you were to keep a high savings account balance, this would mean that you could pay off the mortgage much earlier. And if the balance goes down, then the mortgage takes that much longer to be paid up. Usually the mortgage lender would plan with you on maintaining a minimum balance in your offset savings account all the time.
Higher tax payers find it very attractive to have an offset mortgage in West Auckland., This is because they pay a higher rate of income tax on the interest they earn from their saving account. However, if the interest earned in the savings account is used to pay part of the interest on the mortgage, you end up paying that much less income tax. As reported by a leading financial institution in the UK, 25% of existing mortgage holders would improve their finances if they were to switch to an offset mortgage.
Offset mortgages are quite flexible too and generally without a penalty. For example, you can take a payment holiday or make additional payments if you want to reduce your mortgage term.
Negotiate good terms for offset mortgages in West Auckland
Due to the rising competition among mortgage lenders in West Auckland, it is possible for the borrower to negotiate good terms for their particular mortgage. This can be: free legal work and free property valuations, having two savings accounts as offset accounts and other borrowing facilities such as an overdraft or many other variations. It is possible to join two or more savings accounts to form the offset savings account. This would help new and young house buyers to have a mortgage by amalgamating the savings accounts of their parents.
Problems with offset mortgages
The offset mortgage does come with some disadvantages though. Most lenders impose a maximum credit limit on the account. If this is not adhered to strictly, then you could have an enormous loan to pay off at the end of the mortgage.
You need to have a financial discipline to keep your spending to a planned budget. It is easy to withdraw cash or not to make payments. Either of these is a costly slip.
Who should take out an offset mortgage in West Auckland
Though fairly new to the UK market, the offset mortgage was first started in Australia and has become very popular there. They were initially targeted at the wealthy or high-rate tax payers but nowadays, the offset mortgage is available to anyone who pays income tax and of course has some savings they can use for the offset element of the arrangement.
If you have around a 20,000 pound saving fund behind a 100,000 pound mortgage will make more sense to go for the offset mortgage than the traditional mortgage.