Home > Buying a House > What Is an Offset Mortgage?

What Is an Offset Mortgage?

By: J.A.J Aaronson - Updated: 28 Aug 2010 | comments*Discuss
 
Mortgage Offset Mortgage Save Money

A mortgage generally represents the most significant debt for any household. The repayments on such a debt can be crippling, especially in these times of heightened financial uncertainty and potentially rising interest rates. As such, a means by which interest rates can be lowered and the debtor can therefore save money are always welcome. Offset mortgages are a potentially effective way to reduce the size of your mortgage and, as a result, pay off the debt more quickly.

Savings and Debt

Offset mortgages work on the basis that most mortgage debtors also have savings. Few, however, realise that these savings can be used to save money on their mortgages, by ‘offsetting’ them against this debt. The size of the savings is unimportant, although obviously a larger amount will have a greater effect. Offset mortgage providers calculate interest every day, meaning that even the smallest of savings or deposits can have a significant impact.

There are two main types of offset mortgage, with most mortgage providers offering one of the two. The first is a Current Account Mortgage (CAM). This directly links your current account to your mortgage, meaning that both accounts are managed simultaneously and the total balance appears on one statement. If, for example, you have a £100,000 mortgage and deposits in your current account totalling £5,000, your CAM account will appear to be overdrawn by £95,000. While this may provide an unpleasant jolt each time you check your balance, it should ultimately save you money as interest will be calculated on the outstanding balance (£95,000 in this example) on a daily basis as with a regular overdrawn current account.

The second type of offset mortgage works in precisely the same way, but your savings or deposit account is managed separately from your mortgage. As such, you will receive a separate statement for each account. As with CAMs, however, the savings are offset against the debt and the interest is calculated daily.

Benefits and Drawbacks

The benefit of an offset mortgage will depend on the type of mortgage and amount of savings you have. If yours is a repayment mortgage, you will still have repaid the entire debt at the end of the mortgage term. However, the savings that you have offset against your debt will reduce the total amount that you owe; as such, the mortgage will be paid off more quickly as you will be paying more than the agreed minimum repayments each month. Depending on the terms set out by your mortgage provider, this is also likely to mean that you can release capital from your home without being forced to remortgage.

It should be remembered, however, that interest rates offered on offset mortgages tend to be less favourable than the introductory rates offered by traditional mortgage providers. As such, unless your savings or deposits are of a significant amount, you may find that it is ultimately more beneficial to switch providers regularly in order to keep taking advantage of these special rates. If you have a large amount in savings, however, you should seriously consider an offset mortgage as a means of saving money in the long term.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • MoneyExpertise
    Re: How Much Tax do I Have to Pay?
    GR4HM - Your Question:Ive just started a new job as a labourer so im employed and earn 200 a week will I have to pay tax?
    10 August 2018
  • GR4HM
    Re: How Much Tax do I Have to Pay?
    ive just started a new job as a labourer so im employed and earn 200 a week will i have to pay tax?
    9 August 2018
  • Ivy
    Re: How Much Tax do I Have to Pay?
    Hi, I earn £22,000 a year before tax £16,000 after tax and needed some extra money for house etc repairs and debts so cashed in…
    3 August 2018
  • MoneyExpertise
    Re: How Much Tax do I Have to Pay?
    Lisa - Your Question:HelloI work 26 hours a week £7.83I don’t get taxed as I earn £10,580.I have been over time recently…
    2 August 2018
  • Billy 123
    Re: What is SERPS and What Was 'Contracting Out' ?
    Reply for Joey's mum. I'm no expert and best check with citizens advice but I think you could use you pot…
    1 August 2018
  • Lisa
    Re: How Much Tax do I Have to Pay?
    Hello I work 26 hours a week £7.83 I don’t get taxed as I earn £10,580. I have been over time recently covering holiday which…
    31 July 2018
  • MoneyExpertise
    Re: Taxation for the Self-Employed
    jordo - Your Question:I am a full time student. I have been offered some holiday work with a construction company. I know that I…
    31 July 2018
  • MoneyExpertise
    Re: A Guide to Unemployment Benefits
    rkrgrg - Your Question:I have been unemployed for 2 months. I have started receiving JSA and local council has also made…
    31 July 2018
  • jordo
    Re: Taxation for the Self-Employed
    I am a full time student. I have been offered some holiday work with a construction company. I know that I would be under the…
    31 July 2018
  • rkrgrg
    Re: A Guide to Unemployment Benefits
    I have been unemployed for 2 months. I have started receiving JSA and local council has also made adjustment on my Council…
    31 July 2018