Offset Mortgages: A Dream for Well Off Homeowners

Offset mortgages stand for one of the biggest mortgage inventions seen in recent years. Six old age ago there was hardly an offset mortgage to be seen. Now they and the current account mortgage, to which they are closely related, account for £10 out of every £100 of new lending.

What’s more, one of the UK’s large lenders believes that 25% of existing mortgage holders would be better off with an offset mortgage. So if you’re inch the market for a mortgage you need to cognize what they’re all about. Otherwise you could be lacking out.

Firstly, how makes an offset mortgage work?

The basic thought is that besides borrowing money from the mortgage lender, you also run nest egg or sedimentation accounts with them. Then you are charged interest not simply on what you have got got borrowed but on what you have borrowed less the balance in your nest egg and sedimentation accounts. So, if you had an offset mortgage of £100,000 and had £20,000 in their nest egg account you would only be charged interest on the difference, £80,000. In these circumstances, no interest is paid on your nest egg – the interest is offset.

It doesn’t sound like a land breakage thought – where’s the benefit?

Quite simple. Whilst the full benefit of your nest egg is reflected in a lower interest charge on your mortgage account, legally you have got not received any interest. If you have got not received interest you can’t be charged tax on the interest. Measure away Mister Taxman!

This agency that offset mortgages are especially attractive for higher rate taxpayers who would otherwise pay-away 40% of the interest they have in tax.

Consider some figures. If you had a £100,000 mortgage paying a competitory rate of 4.69% plus £20,000 on deposit, how would the figs work out? Well over A typical 25 twelvemonth mortgage, without offset you would pay £85,351 in interest but with offset you would pay just £41,998 – that’s a economy of £43,353. What’s More you would refund the mortgage five old age and eight calendar months early. That’s because the monthly repayments are based on the full mortgage debt before offsetting is taken into account so borrowers are effectively overpaying their debt each month.

And doesn’t Mister Taxman expression sorry! In theory, a criterion tax remunerator saved £9,538 in tax and a higher rate taxpayer a humongous £17,341 in tax.

Flexibility can also be a major advantage. You can typically pay off capital without penalty, underpay and take payment holidays so long as you’ve made sufficient overpayments throughout the years.

Too good to be true – where’s the catch?

Historically borrowers have got had to pay a higher interest rate for the benefit of an offset mortgage. But the good intelligence is that with banks and edifice societies fighting for a bigger share of the offset market, offset interest rates are falling.

This agency that you need to look carefully to guarantee that the evident tax nest egg you could do are not eliminated by the slightly higher interest charge. Quite honestly this is not an easy computation so it’s best left to your professional mortgage adviser.

But as a guide, a criterion taxpayer needs around £20,000 in nest egg behind a £100,000 mortgage to do the offset deal better value than a traditional mortgage. For a higher rate taxpayer the nest egg demand driblets to around £10,000. (These figs are based on a typical 4.69% fixed offset rate, compared with a typical 4.49% rate for a tracker.) These figs will change as interest rates change and, in all probability, as the cost derived function between an offset and a traditional mortgage closes.

Not all Offset Mortgages are the same!

As you would expect, with the offset lenders fighting for your business tons have got added bell and whistlings to the basic concept. Free property evaluations and free legal work are relatively common. Then some banks volition include your current account in the offset calculation, some lenders enable two nominated nest egg accounts to be offset, some will even hold an further borrowing installation with a check book that tin be used at any time.

On the interest rate presence you’re jump to be offered a low starting rate fixed for six or twelve months. You might also be offered a tracker which is below the Bank of England alkali rate for six calendar calendar months and which only lifts above after six months or a tracker which exactly tracks alkali rate plus a bantam insurance premium for a few years. There are tons of variations.

The interest rate can also depend on what percentage of the house evaluation you desire to borrow. For example, one lender is currently offering 5.6% if you are borrowing less than 50% rising to 6.45% for up to 99%.

Like so many things, whilst the basic conception is simple, it then gets complicated! This clearly underscores the need to speak things through with an independent mortgage adviser. It’s their occupation to guarantee you get the right type of mortgage and the best deal.

If you have got savings, there’s A large opportunity they’ll urge an offset mortgage.

*Indicative figs right as at November 2005