Buying a home is an exciting time, and it is the biggest financial purchase that most people undertake. The majority of homebuyers cannot afford to buy a house outright and it would be impractical to save up the full amount of the house before you bought it, because you would need somewhere to live in the meantime. Therefore, the usual practice is to take out a mortgage ? a loan secured against the property you are buying.
In the United Kingdom, there are different types of mortgages to choose from, which include a mortgage that is a big success in Australia, from where it originated. It is called an offset mortgage. Basically, offset mortgages use the interest earnt from your savings accounts and current accounts against your mortgage interest; and as a result this reduces your overall mortgage repayments.
With offset mortgages, your mortgage account runs alongside all your other accounts, and the net balance for all the accounts is calculated, normally on a daily basis. The interest is then worked out on the overall total you have in your accounts. All the interest you have earnt from your savings and current accounts goes straight into your mortgage account.
As with most mortgages there are variations around this theme, such as a current account mortgage (CAM). Your salary is paid directly into your mortgage account where it immediately reduces your mortgage balance. You can then draw against the account for your normal spending as you would with an ordinary account. The mortgage balance and interest is calculated daily, so even if money were left in your account for a short period, it would still have some positive impact on the cost of your mortgage.
Offset mortgages are very efficient. They will enable you to dedicate the bulk of your savings to reduce your mortgage, which can save you thousands of pounds from the mortgage cost, and allow you to pay off your mortgage early. You would still have the flexibility to divert your savings to other uses, however you would give up some of the savings made on your mortgage.
The drawbacks to offset mortgages, is that the mortgage interest rates can be higher than the deals you could get on other types of mortgages, and there are often no special offers, such as low discounted rates for the first few years. If you tend to keep a low balance in your current account and have little in the way of savings, the benefits you get from combining the accounts may be too small to outweigh the extra cost of the offset mortgage. You also need to be efficient with keeping track of your financial outgoings, especially in the case of a CAM where you have just a single account for both your mortgage and current account.
You do not necessarily need an offset mortgage to pay off your mortgage early. You could have an ordinary mortgage and a completely separate savings account. Then, occasionally you could use your savings to pay off a chunk of your mortgage, which could end in you paying off the mortgage early. However, unlike offset mortgages, you would have to pay the tax that was earnt in the savings account.
An offset mortgage could be the right mortgage choice for you, if you are good with your finances, generally have a high current account balance, have reasonably high savings and you are a taxpayer, particularly a higher rate taxpayer. In the United Kingdom, an increasing number of financial lenders are offering offset mortgages because of the benefits they offer to the customer.
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