We explain the potential benefits of combining a flexible mortgage with your bank account.
An offset mortgage is a flexible mortgage arranged in conjunction with a bank account, and in some cases a savings account and/or loan. The main benefit lies in the ability to 'offset' credit balances on a current account and savings account against the mortgage, with interest calculated on the net amount owing.
The other advantage is that the interest paid on your loan will be at the same interest rate as your mortgage, which is typically lower than the interest rate of a separate loan.
With an offset mortgage you keep the balances for your mortgage, current account and savings in separate accounts (with the same provider), but all balances are still offset against each other. This means that the credit balances reduce the mortgage amount on which interest has to be paid. Therefore it's easier to manage the separate accounts.
For example, if you owe £100,000 on your mortgage, hold £1,000 in your current account and £3,000 in a savings account, the overall balance is £96,000, so you only interest on the £96,000 balance.
In addition to offset mortgages, a similar type of mortgage is available; current account mortgages. These mortgages work in a similar way, offering the same benefits as an offset mortgage, but rather than having separate accounts the current account and mortgage are combined in to a single account.
Money that is held in a current and/or savings account that is used to offset against a mortgage will not receive interest on the credit balance held in those accounts. However, rather than generating a small amount of interest, your current account and savings work to reduce your mortgage payments and enable you to repay your mortgage faster.
Most offset mortgages are variable rate mortgages whereby the amount you repay increases or decreases in line with any interest rate changes.
Most also offer flexibility in allowing over payments to clear the loan earlier, or limited periods of underpayment if required. Others also allow a credit limit on top of the agreed mortgage, depending on the amount of equity in the property, like a loan facility. The catch lies in the loan-to-value ratio negotiated at the outset. The higher the loan-to-value agreed, the higher the rate of interest even if you never use the full loan facility.
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
