Offset Mortgages – Advantages and Disadvantages
The UK mortgage market offers a wide range of mortgage products to homeowners. Offset mortgages, which were born in Australia, have become very successful in the UK. Borrowers of offset mortgages use interest earned on their current and savings accounts to pay off the interest accrued on their mortgages. The offset mortgage account, therefore, is closely associated with the borrowers’ other accounts, such as savings accounts and current accounts.
Types of Offset Mortgages
There are different types of offset mortgages.
1. Current account mortgages (CAM)
Current account mortgage is just one of the several types of offset mortgages offered in the UK mortgage market. In case of current account mortgage, your salary is credited to your mortgage account, and you can draw as much of it as you wish for your everyday spending.
For instance, if you have taken a mortgage worth £1,00,000 and have £10,000 in your current account, your balance will show as £90,000. The calculations are done everyday and you will have to pay interest only on the balance shown. Plus, you are not taxed on the interest you earn on your savings.
2. Multiple account mortgages
Some mortgage lenders associate multiple accounts with one offset mortgage; as a result, borrowers will have a deposit account and a mortgage account.
Irrespective of the type of offset mortgage, they allow borrowers to use their savings to reduce their mortgage loans, enabling them to save a lot of money, to pay off their mortgage loans early, and to become proud owners of their homes. Although borrowers can use their savings for other purposes, they will have to spend a fraction of them to pay off their mortgage loans.
Tax Benefits
Offset mortgages might have certain tax benefits for borrowers. In the UK, interest generated on current accounts and savings accounts is considered to be income and is, therefore, taxed. However, if you have an offset mortgage, the interest earned on savings is not taxed, but goes to pay the interest accrued on the mortgage loan.
Advantages and Disadvantages
Offset mortgage rates tend to be higher than the rates offered on other types of mortgages; moreover, offset mortgages do not come with special offers such as discounted rates for the first few years of the term, and so on.
Instead of getting an offset mortgage, you can get a traditional mortgage and maintain a separate savings account. You can then use the money you have saved to pay off your mortgage loan. However, you will be taxed for the interest earned on your savings. On the other hand, if you get an offset mortgage and combine your mortgage account with your current account, you will not be taxed for interest earned on your savings.
Offset mortgages are ideal for people who are exceptionally good at managing their funds, have a fat current account balance, high savings, and are high rate tax payers. The biggest benefits of an offset mortgage is the amount that can be saved on taxes and the option to pay off the mortgage early.