Offset Mortgages revisited Wednesday, 25th November 2009

40% of homeowners don't understand the basic idea of an offset mortgage research by First Direct has revealed. And what is more a further 35% only roughly know how they work.

What this shows is that people are missing out on saving money and reducing the term of their mortgage with just two in 10 seeing offsets as a way they can save money on their mortgage.

Changing to an offset mortgage could cut down the length of a £100,000, 25-year mortgage by four years and save £24,232 in interest payments over the lifetime of the mortgage.

It is a concern that buyers are not aware of the benefits of an offset mortgage, so below is a reminder of how they work and the money they can save.If you own a home and have some savings, then an offset mortgage could make your savings work for you - and save you money into the bargain. An offset mortgage is one of a new kind of mortgage that offers flexibility to homeowners.
Offset mortgages work by allowing you to offset your credit balances on some accounts against the debt balances on others. For example, if you have an outstanding mortgage loan of £100,000 and you have £10,000 in savings, offset mortgage providers will allow you to pay interest only on the total amount of debt. This means that you will pay interest on £90,000 instead of on the full amount as with a standard mortgage. Over the course of time, this can save you a great deal of money in interest payments.The same principle applies to credit card balances and current accounts. As part of an offset mortgage, with some lenders you can offset the credit balance in your current account against the debt balance on your credit card and pay interest only on the total amount of debt you owe. What is more, you can repay the interest at the lower mortgage interest rate rather then the standard annual percentage rate (APR) of the credit card.
An offset mortgage is quite similar to a current account mortgage, which also allows you to roll all your debts up and offset any credit you have against them. However, there is one important difference. With a current account mortgage, your mortgage, credit cards and other debts are all part of your current account, effectively giving you a very large overdraft. In contrast, an offset mortgage allows you to keep all the accounts separate, while still retaining the offset benefits.Offset mortgage accounts are also similar to flexible mortgages. Many offset mortgage offers allow you to repay lump sums without penalty and to take payment holidays if you have overpaid within a particular period. Remember however underpayments and payment holidays could increase the mortgage term and/or the total amount payable.The price for all this flexibility comes in the offset mortgage rates, which are typically higher than those for standard mortgages. Rates are usually variable and fluctuate along with the Bank of England's base rate. However, it is worth doing your sums to see if this type of mortgage offer may be right for you. Offset mortgage holders who make the most of the offset account features usually repay their mortgages earlier than other mortgage holders by as much as Eight years and Eight Months** and also pay less in interest.Offset mortgage offers work best for people who are able to save. If your savings are small or intermittent, you may not be able to make the most of your offset mortgage deal, as the key is to use the flexibility to repay as much as possible and to pay as little interest as possible. People who get lump sums such as bonuses or dividends may also find that the flexible repayment scheme negates any higher offset mortgage rates.An offset scheme may also suit self-employed people, who may receive money intermittently and may benefit from the chance to repay less at some times and more at others. If you fit any of these profiles, consider an offset mortgage and keep your money in your pocket instead of the bank's.