Offset Mortgages - Finally Explained Simply and Concisely!

Offset mortgages are the kinds of financial arrangements that make prospective borrowers apprehensive, worrying that there might be all manner of hidden pitfalls. They are actually quite easy to understand and they have benefits and drawbacks depending on how they fit an individual borrower's circumstances.



Offset mortgages can save you, the borrower, masses of money over the longer term. They are the perfect mortgage product for people who work in sales and earn commission regularly, or for people who get bonus payments through their employment as the additional income can be paid into the savings and subsequently off the mortgage.



The advantage to the borrower is that this helps to bring down the cost of the mortgage more quickly than a normal home loan. The other advantage is that in paying off lump sums of the mortgage you can save on the costs of interest. Anyone properly reads their mortgage annual statement will know that this is where the main cost of the mortgage lies.



As you're paying off lump sums, over time you'll save a small (or potentially large) fortune on interest. Not only that, you'll also be shrinking your mortgage a whole lot quicker than on a normal mortgage.



Offset mortgages are much more fluid than and not as structured as a fixed rate mortgage, or even an interest only mortgage. It's more possible to overpay on the mortgage (in fact that's the idea!) and you won't be subject to penalty charges for it as it's taken out the savings account. Yet there is also more scope for underpayments also, taking a month payment holiday is easier if you're jetting off on holiday yourself and need the extra cash!



Most standard mortgage contracts don't allow overpayments, so for allowing you the privilege of this you will usually not earn any interest on money sat in the savings account linked to your mortgage. Instead, the payments just come off the balance of the mortgage whenever you want them to.



One of the problems faced by lenders who offer offsets is that there is a perception that they are too complex and risky and just too unfamiliar to borrowers for them to feel they are an attractive proposition.



Whilst having savings in your linked account will help you reduce your mortgage interest payments and help you pay your mortgage off faster, you should remember that you don't receive any credit interest on your savings. They are designed to save mortgage interest, not generate credit savings interest.



Offset mortgages are increasing in popularity in the UK. Whilst offset mortgages may only have accounted for under 10 per cent of all home loans in the past, a spokesperson at the mortgage broker London and Country believes that offset mortgages are now closer to 15 per cent of the overall mortgage market.



As with all mortgages or remortgages, we recommend making an appointment with an Independent Financial Adviser, aka an IFA, or an independent mortgage broker for impartial and whole of market advice. People in general are starting to look beyond fixed rate and interest only mortgages to more marginal options such as offset, discounted or capped mortgages, talking to an IFA can set you set you straight and figure out which is the best option for your circumstances.





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Timothy Frodsham writes for Just Commercial Mortgages.com the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.