Having an Offset Mortgage could help set you free from your mortgage debt sooner. Read on to see how this type of mortgage could help you.
No matter how much we have, we all have one thing in common when it comes to money. We want it to work as hard as possible for us!
One of my earliest TV memories is of the Halifax CardCash advert from 1987 (perhaps the signs about a future career in finance were there all along!) The ad sees a man with unnaturally perfect morning hair but poor fridge planning skills, run out of milk for his cat on a Sunday morning. The banks would have been closed in 1987 but breezily, and with little consideration for his feline friends healthy diet plan, he heads out to the cashpoint with his cash card to solve the problem which is stopping him from kicking back lazily in his loft like apartment. With the strains of Lionel over the top, he makes a withdrawal, slightly oblivious to the risk of showing his card details to the camera and heads back home. The ad closes with him sitting relaxed with the paper and a happy cat. The message is clear. With the right financial provider behind you life cannot just be good but also stress free. Your money can still be working when you, and the rest of the world, are not!
And this idea brings me nicely to the Offset mortgage. This type of mortgage has been around in the UK market for a number of years however it is still often seen as a niche mortgage type which is only suitable for high net worth individuals. Thankfully this perception is slowly changing as more borrowers, and in fact increasing number of advisors, continue to develop their understanding of how these mortgages can work for their clients just as well, whether they are self-employed, professionals or ‘everyday’ borrowers.
In its simple form an offset mortgage is like any other, often with either a fixed or variable rate of interest. What makes it different to a ‘standard’ mortgage is that alongside it sits a deposit account into which the borrower can put existing savings and/or regular deposits. These accounts have developed over the years so that lenders now offer them with instant access to the funds if needed. The ‘savings’ account will itself not attract any interest however the borrower will not pay interest on the equivalent amount of their mortgage. For example a borrower with a £100,000 mortgage with £50,000 in the deposit account will only pay interest on the difference, in this case £50,000.
So what’s the benefit of this? Well firstly the rate of interest on the mortgage is likely to be greater than the interest payable on the savings if in an instant access deposit account. As a result the not paying of interest on one financial product could save the borrower money compared with the earning of interest on another. A self-employed individual who regularly saves for their annual tax bill may be interested in their normal savings reducing their mortgage costs.
Additionally, where the borrower continues to make the same monthly mortgage payment that they would be paying without the offset arrangement sitting behind everything, they will essentially be overpaying their mortgage and can therefore reduce the term and overall interest charged on their mortgage. Often when we sit down with a client and explain the above with some examples they are pleasantly surprised as to how much faster and for less, they can repay their borrowing. A young professional with little savings but a good level of income which they plan to start saving may fid an offset mortgage attractive and may help them achieve their retirement plans.
But here’s the ‘catch’. They are not for everyone, and its only by fully understanding your situation that an advisor can make a recommendation as to whether this type of mortgage will work for you. Due to their nature the rate payable on an offset will often be marginally higher than a ‘standard’ mortgage therefore understanding not just the financials but the financial behaviour, short term and long term goals of the client is key to ensuring that this mortgage product truly works as hard, and as suitably, for the borrower. To do this an advisor needs to complete a full fact-find, perhaps exploring some aspects of your finances which don’t immediately seem to be linked to your immediate mortgage need but which could allow you at least on a Sunday morning, kick-back and relax a little knowing your money is still working for you.
Your home maybe repossessed if you do not keep up repayment on your mortgage.