Offset and Current Account Mortgages

Offset and Current Account Mortgages are similar in concept and both work on the principle that if you use any surplus funds available at any time you can "offset" them against your mortgage balance and the lender only charges you interest on the net balance of your mortgage. This can mean you will pay less interest on your mortgage over the term and potentially pay it off early.

Let's look at an example:
You have a mortgage of £250,000 and you choose to offset your savings of £20,000 against your mortgage. You do not earn interest on your £20,000 savings, but you will only be charged mortgage interest on the equivalent net balance of £230,000.

There can also be tax benefits to doing this. In the above example, you do forego the interest you would have received on your savings but you therefore have no tax to pay on the interest. Your savings are therefore being used to reduce the interest costs of your mortgage. Whatever rate you are paying on your mortgage is therefore equivalent to a "net" rate you would have to receive on a savings account to get the same return. Like any savings account you can withdraw the funds at any time should you need them.

The main difference between Offset and Current Account Mortgages is as follows:

• Simple Offset - a simple Offset Mortgage, which is offered by most lenders on discounted, tracker or sometimes fixed rate products, is usually a mortgage with a savings account alongside so you can offset any savings as described above.
• Full Offset or Current Account Mortgages - some lenders have brought out a more sophisticated version that involves your current account also being linked to the mortgage. This means that any money going through your current account on a monthly basis also reduces the balance on which interest is calculated on your mortgage. The balance will fluctuate as money goes in and out of your current account but the principle is exactly the same and can lead to additional savings in interest paid.

With Offset mortgages there are normally a couple of options available to you in terms of your monthly payments:

• Leave payments as they are - when you offset savings or monies in your current account the amount of interest you are charged on your mortgage on a monthly basis goes down. Leaving your monthly payments at the original level however, effectively means you are making overpayments to your mortgage and if you maintain this, you will pay your mortgage off early and pay less interest over the term. These savings can be quite substantial.
• Lower monthly payments - some lenders will allow you to lower your monthly payments in line with the reduced interest you are getting charged. This means you benefit immediately from the lower payments but are unlikely to pay your mortgage off early.

Offset mortgages have lots of advantages but you should also be aware of a few things:

• Although you are being charged interest on the "net" balance between your mortgage and savings accounts, the actual balance on your mortgage doesn't change, other than in line with your monthly payments.
• If you go for the full current account offset option it means transferring your current account to the same provider as your mortgage which may not suit you. It is however now much easier to do and some lenders have processes in place to make this as easy as possible.
• Some lenders charge a slightly higher rate or fee for an Offset Mortgage. This is normally, more than made up for by the savings you make over the longer term but you should consider this carefully if you intend to remortgage on a regular basis.

These products are now widely available but do differ from lender to lender. The Directors of Dedicated Mortgage Solutions have a number of years experience in this market and our expertise can help ensure you get the best deal available. We can also give you a tailored example based on your circumstances to let you see how much you could potentially save with this type of mortgage. For more information and advice on Offset Mortgages please contact us on 0845 602 5541 or complete our online enquiry form.