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Offset Mortgage

By: Emma Eilbeck BA (hons) - Updated: 28 Oct 2010 | comments*Discuss
Offset  mortgage   lender

Trying to understand how an offset mortgage works can be a tricky business, but if you do manage to work out its mechanics, it could pay off.First things first, offset mortgages are not for the shopaholics out there, they benefit borrowers with multiple savings accounts and those that like to save every penny.An offset mortgage combines all your accounts, for example, you may have savings of £30,000, this could be split between a savings account an individual savings account you may also have a £90,000 mortgage, with an offset mortgage these will be combined, but you will still only pay interest on the balance of the mortgage.The lender will calculate your interest daily, so literally every penny that is in the account counts, and will help reduce the overall rate of your mortgage.Offset mortgages are relatively new to the UK market and were only introduced in the 1990s.

How do Offset Mortgages Work?

Offset mortgages work in two ways, depending on which lender you decide to choose.One method, the current account mortgage, which does not suit everyone, shows you all your accounts combined, including the amount you owe on your mortgage. For example, you could go to check your balance and it tells you that you’re £10,000 into your overdraft, in reality though you could be £25,000 in credit without your mortgage being taken into account.As well as adding any savings into the account you can also add any debts into the account, which could make checking your balance a frightening experience.Another type of offset mortgage is where money is kept in separate accounts, but the interest is still calculated in the same way.

This method may make a trip to the cash machine a bit less scary.

Getting the Best Deal

Most lenders will still require you to make a monthly payment, however you will no doubt find yourself paying more than this sum off becuase you will not be as tempted to withdraw as much from your account. Any money left in the account which is over the monthly payment will automatically reduce the interest charged on the mortgage.Offset rates are not always the best in the market, but this does not mean that they don’t offer the best solution.

If thinking about all the debt you will incur when taking out a mortgage leaves you with sweaty palms, an offset mortgage could be worth looking at.A lot of borrowers tend to wish their debt away or carry on spending regardless of mounting bills, with an offset mortgage you know where you stand and what you have to pay off.An offset mortgage allows you to know where you stand, and for many it will make them pay off their balance quicker and earlier because they can see how much they owe on a daily basis.If you are a spender and your wages don’t have chance to get warm in your account before you are out spending them, an offset mortgage is not for you.If however you are someone who likes to save for a rainy day and be in as little debt as possible, then an offset mortgage may prove to be the best for you.

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