Current Account Mortgages
There are two basic types of offset mortgages. The first offset mortgages launched in the UK were Current Account Mortgages, linking a homeowner’s current account with the mortgage. Britannic Money’s Current Account Mortgage was first, launched in 1997, followed closely by Virgin One, now called The One account run by Royal Bank of Scotland.
With Current Account Mortgages, the bank account and mortgage are combined so customers view just one statement and see one balance. For example, if there is £2,000 in the current account and the mortgage is £80,000, the customer’s balance will register £78,000 overdrawn. The balance is calculated daily and the homeowner pays interest only on the balance. Current Account Mortgages offer the same services as an ordinary bank account. Customers can also add any savings into the Current Account Mortgage to reduce the debt balance. Any other debts, such as credit cards, can be transferred to the account. The homeowner, typically, pays the same interest rate across the lot.
The second type of offset is where the deposits are kept in separate accounts or ‘pots’, but linked for the purposes of interest calculation. Providers include Woolwich, Intelligent Finance and Standard Life. With these, as with Current Account Mortgages, borrowers pay interest only on the mortgage, minus savings.
The Difference to Repayments
With both types of offset, borrowers usually make a regular monthly repayment, though this may not be strictly necessary. For repayment mortgages, this guarantees that the mortgage will be repaid at some future point, regardless of offset. Any savings that are offset against the loan will reduce the interest charged on the mortgage. This means that the borrower is effectively overpaying on monthly repayments and effectively reducing the overall term of the mortgage.
Within limits, offset deals also allow homeowners to draw more funds at any time without having to remortgage. Also lump-sum overpayments may be made without penalty.
Interest rates on offset mortgages will very rarely be the best on the market. You could get a cheaper special deal on a traditional mortgage if you are willing to shop around and switch lender every couple of years. Offsetting, therefore, is only worthwhile if you have a reasonable amount of money in your savings or current account.
Your property may be repossessed if you do not keep up repayments on your mortgage.
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