Many people have reached a situation where they feel they could like to pay off their mortgage early but are not quite sure to go about it, or, indeed, if it would be of any great financial benefit. With an offset mortgage early repayment is hugely advantageous. It could save you thousands of pounds over a typical 25-year mortgage period.
It works like this: you set your savings against your mortgage debt and, by giving up earning interest on the former you do not pay it on the same amount of your mortgage debt.
Savers avoid paying tax on interest that their deposits would otherwise have earned, and because offset mortgage lenders calculate interest daily, every pound on deposit works hard to reduce the cost of borrowing. In addition, the fact that, in a low interest rate environment, you are effectively earning interest at a higher rate than most mainstream savings accounts will pay.
With interest paid only on the balance between savings and mortgage debt you achieve the same effect as over-paying a home loan – but you can get the money back if you need it. Not to mention the fact that in a low interest rate environment, any savings you have are effectively earning interest at a higher rate than most mainstream savings accounts will pay.
In the simplest type of offset, deposits are kept in separate accounts but are linked for the purposes of interest calculation. If you put more money on deposit your balance reduces, if yo withdraw then it increases.
The first offset mortgages were known as CAMS (Current Account Mortgages), which linked a homeowner’s current account with the mortgage. CAMs offer the same services as an ordinary bank account, and customers can also add any savings into the CAM account to reduce the debt balance. Any other debts, such as personal loans or credit cards, can be transferred to the account. The homeowner pays the same interest rate across the board.
In the currently difficult economic climate this is one of the most effective ways of obtaining a decent return on savings while at the same time significantly reducing the term and cost of a mortgage Such mortgages are not common, one of the main reasons for this being that most people view them as being too complex and a vehicle only for the very rich, but that is far from the truth. This type of loan is straightforward enough if you are clever with money management, and the benefits are clearly stated.