What is an offset mortgage?



Offset mortgages link the balances in a borrower's mortgage account and/or savings account. Interest earnt from the savings and/or current accounts is used against the mortgage debt and in theory; the mortgage can be paid off quicker. An offset mortgage is also flexible and allows overpayments, underpayments, and sometimes payment holidays.

The concept of an offset mortgage is very different from a standard type mortgage and you can't just compare interest rates to find the best offset mortgage deal. Offset mortgages come in a variety of shapes and sizes that can suit your particular needs and circumstances. Therefore, you need to look at an offset mortgage deal as a whole before you decide which is the best offset mortgage deal for you. The Council of Mortgage Lenders (CML) said in 2006, approximately 170,000 offset mortgages were sold, which was worth ?23.9 billion.

Many households looking for a new mortgage deal would be better off with an offset mortgage, yet they account for a minority of the market ? about 7%. Most householders tend to settle with what they know, i.e. a traditional type of mortgage, because many people find it hard to understand the potential benefits that an offset mortgage could offer, such as yearly savings, flexibility, and tax benefits.

An independent mortgage broker

To help you choose the best offset mortgage deal for you, it is advisable to seek assistance from trained personnel who give impartial advice, such as an independent mortgage broker. Like any financial service in the UK, an independent body called the Financial Services Association (FSA) regulates them. The FSA applies the Principles of Business to companies, for example, Principle 6 states all customers must be treated fairly, and Principle 7 states information provided must be clear, fair and not be misleading. Therefore, you can rely on independent mortgage advisors to help you find the best offset mortgage deal.

Research by the CML showed that the majority of offset mortgages are sold through intermediaries. By the end of last year, intermediaries accounted for 60% of all offset mortgages sold, compared to 45% in April 2005.

Different types of offset mortgages

Since the first offset mortgage was introduced into the UK in 1997, the number of offset mortgage lenders has increased five-fold over the last decade, and the number and range of offset mortgages has increased to about 250 offset products. For example, the buy-to-let offset mortgage lets borrowers pay in their rental income into their savings/current accounts to offset the outstanding mortgage balance. There are offset mortgages suitable for people with irregular income, such as the self-employed, commission based employees, and first-time buyers.

Offset products are often associated with people moving home and remortgagers, who are slightly older and higher income individuals. However, offset mortgages are now suitable for some younger first-time homebuyers. These include the ?family offset? that allows the borrower's family and/or friends to use their saving balances to offset the borrower's mortgage debts.

In conclusion

Offset mortgages are growing in popularity and they are being described as a ?lifestyle tool? that can help mortgage borrowers maintain control of their finances. An independent mortgage broker can provide invaluable advice in helping you choose the best offset mortgage deal for you.