Offset Mortgages

Note: If you have both a mortgage and savings with the same organisation, it may be worth considering an offset mortgage. Think of an offset mortgage as a big umbrella that covers all of your separate financial dealings with your lender.

Every day their computer systems will tally up the score between the two of you. Your mortgage may stand at $156000, you may have a personal loan of $20000 and your credit card balance might stand at $4000. In total you’d owe them $180000. But your current account might stand at $2000 and you may have savings of perhaps $18000 deposited with them.

So, when it comes to the interest being calculated, any savings that you’ve deposited with them are used to reduce (or offset) the amount of debt that the interest will be based on. In other words, you owe them a total of $180000 - $20000 = $160000 and the interest will be charged accordingly.

However, in return your savings will earn no interest. In effect, this type of mortgage operates as if you’ve used all your savings to reduce the size of your debts. So provided the interest rate on your mortgage is higher that the return your savings would earn, you’ll save money. Your mortgage will also be repaid in a shorter time which will save you even more money in interest.

An offset mortgage will also allow you to repay your other debts at the same rate of interest as your mortgage. Few credit cards or personal loans will be able to offer such a low rate!

What’s more, despite the low rate of interest charged on these other debts, they will normally remain unsecured. So if you can’t keep up with the repayments on your personal loan or credit cards, your house will not be directly at risk.

But take care with this situation. In effect what you’re doing is turning your short term borrowing (credit card debts and personal loans) into long term debt that could take up to 25 years to be repaid. This would cost you much more in the long run, so it's vital to repay these debts over a shorter period of time.

To work out how much you could benefit from this type of mortgage, it’s best to ask potential lenders to show you a few examples. This type of product is most likely to be of interest to those with volatile incomes, annual bonuses, or substantial savings. But this added flexibility comes at a price. Offset mortgages are normally offered at the lenders standard variable rate rather than a special discount rate. So it’s important to shop around.

Next: Save Money On Your Mortgage After It Begins

Previous: Repayment Mortgage Options

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