offset mortgages

Offset Mortgages

explained

These loans have only really become available over the last 10 years or so. Their aim is to save the borrower money by minimizing the amount of money the borrower has borrowed at any one time. In other words they try to offset a persons savings or current account deposits against their borrowings therefore reducing the amount on which interest is paid. The saving is achieved by pooling the mortgage loan and any savings the borrower has into one account.

You must be remembered that if you have savings, you pay tax on any interest received. With an offset mortgage those savings end up being used to effectively reduce your loan so you end up not paying any tax on savings as well as reducing the interest paid on your mortgage. Obviously you will also have forgone the interest received after paying any tax on your savings.

In order to benefit from these savings interest is calculated daily. Therefore, assuming you work, at the start of the month when you get paid and have your months salary in your account you will be paying less interest on your mortgage than near the end of the month and you have spent most of your salary. THis type of loan is often called a Current Account Mortgage (CAM) where the borrower only has 1 account and receives one statement every month. With CAMs all existing other debts (credit cards, personal loans, overdrafts etc), savings accounts and current account are all combined in one account, providing the borrower with a very simple way to know assess current financial position.

True Offset loans vary from CAM account by keeping keeping the debt and deposits/savings accounts separated out but work out any interest due by combining the balances first. Under the hood an offset loan is the same as a Current Account Mortgage, all it does is give the borrower a psychological benefit from not seeing a huge figure when they look at their 'net worth'. Instead they still see their savings accounts too.

Offset and CAM loans are only really beneficial to borrowers with substantial savings. In effect they are a form of early repayment and a a way to maximize the amount of the loan you pay off. Everyone knows that generally if you borrow money you pay a higher interest rate than you receive when you save money. Therefore by this logic alone it makes sense to use any savings you have to offset or reduce you borrowings and as a result the interest that you pay.

All this said, if you have a very small amount of savings then this type of loan is probably not for you.