Before you apply for an offset mortgage it is important that you comprehend how it actually works, if not you may not eventually benefit from its savings capabilities. An offset mortgage is very much similar to a current account mortgage and it is very flexible with regard to repayments. Depending on the lender most offset mortgages allow for overpayments, underpayments, payment holidays and borrowing back.
So how does an offset mortgage work?
An offset mortgage is a type of "all in one mortgage". Offset mortgages encourage you to use your savings or current account to 'offset' an amount of your mortgage loan principle each month. This means your savings and your mortgage debt become one, meaning your mortgage loan principle is reduced by the value of your savings.
Subsequent months your income will be put into your account where you then spend whatever money you would usually spend on regular bills etc. The money left over is then used to repay part of (offset) your mortgage loan. The interest rate will be calculated daily so any reduction on the mortgage capital will have an immediate effect on the interest charges. As long as you keep repaying the mortgage capital as well as the interest charges each month, the interest charges should decrease gradually over the term.
An offset mortgage is versatile with repayments so you have the choice to pay-off your mortgage early and cut down interest charges. This could result in a huge savings over the mortgage term.
The difference between an offset mortgage and a current account mortgage is that with an offset mortgage your accounts are kept separate so you can monitor each account separately. Ideally to make real savings from an offset mortgage you would want some savings already built up – probably around £8000 would be great.
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