Offset Mortgages - How Do They Work?
While they have been popular in other areas of the world for some time, it is only over the last few years that “offset mortgages†are becoming more widely available in the UK. As with any new financial product it is taking some time to educate the public about the pros and cons of these mortgages, but there are signs that the message is starting to get through.
What Are Offset Mortgages?
An offset mortgage is basically an arrangement which takes into account the homeowners debit and credit balances, and it can have a major effect on reducing interest charges. They can be set up in two different ways :-
· One account where the customers income is paid in, and is offset against the amount outstanding on the mortgage. The mortgage account will be in deficit until the mortgage is fully paid off, but the fact that all income is being offset against the outstanding balance (even though some funds will be withdrawn over the time for living expenses, etc) reduces interest payments substantially.
· Two accounts. Many financial institutions will run two accounts side by side, one where all income is paid into (and living expenses withdrawn from), and one which shows the outstanding mortgage figure. They will in effect be treat as one account, with a net figure of the two accounts used as the basis for interest charge calculations.
While you do not actually receive interest on credit balance in this type of arrangement, there are tax benefits. Interest on credit balances normally incurs a tax charge of 20%, although as no interest is being paid no tax charge will be incurred - although you will receive the full benefit of reduced interest charges on the mortgage.
On the downside there will be a limits as to how high your mortgage deficit can rise, how much income you can withdraw, and these will be reviewed on a regular basis. While there is greater flexibility, and reduced interest payments, financial advice must be taken prior to deciding which type of mortgage is best for you.
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