FISCUS MORTGAGES - INFORMATION AND ADVICE

Offset Mortgage

These types of mortgages are a relatively new and innovative approach to personal finances. The offset mortgage (also known as a current account mortgage) varies from lender to lender, but the basic idea involves pooling all you financial assets and obligations into one place. All your debt is transferred to your mortgage, charging an agreed mortgage-rate interest. Let us, for illustration purposes, say that this debt totals £100,000 and charges an interest rate of 5%.

Alongside this, your financial assets are placed into a linked savings/current account. This would include savings (if you wish to place them in) and usually requires you to pay your salary into this account. To use our example, imagine that this totals £30,000 held in a linked, instant-access savings account.

Normally, with a conventional savings and mortgage account held at one financial institution, you would make monthly mortgage repayments that are calculated using the 5% interest payable on your £100,000 mortgage. Alongside this, you would receive interest on your £30,000 savings, although usually this would necessitate the use of a high-interest savings account and a much lower interest current account for day-to-day purchases. Tax would be paid on the interest earned, although some exceptions exist, such as investing in an Individual Savings Account (ISA).

With an offset mortgage, the lender would not pay interest on your £30,000 savings in the traditional way. Instead, rather than charge 5% on your £100,000 mortgage, they instead charge interest on £100,000 minus the £30,000 savings, thus charging interest in total on £70,000. This would therefore lower your monthly mortgage repayments.

This means that your £30,000 would be, in essence, accruing interest at 5%. If this 5% was paid to you normally, tax would be owed on the interest earned. By deducting this from your mortgage interest rather than paying it to you, it means there will be no tax to pay, resulting in an effective interest of 5% net (after tax). To get this sort of return on a normal investment, you would usually have to earn around 8% gross (before tax), although this depends on your annual income.

Quite often, these types of combined accounts also act as flexible mortgages, allowing money to be transferred between the two accounts with ease – both to increase borrowing through the mortgage account and conversely to overpay mortgage repayments (or repay large lump-sums) to reduce your overall debt.

This is a great innovation to the mortgage market and there has been a rapid increase both in the number of offset mortgage products available and the use of these mortgages by homeowners. The lenders that brought this product to the market early on included One Account and Intelligent Finance, however many banks and building societies have now entered the fray and offer rival offset mortgages.

Our daily updated current account mortgage tables compare the best rates available on current accounts from the vast majority of UK mortgage lenders and act as a great benchmark for you to use when looking for competitive interest rates on the market.

As with all financial products, we recommend that you seek advice from a trained professional before making your decision. Please fill out our mortgage enquiry form and we will have an Independent Financial Adviser (IFA) contact you within 24 hours.