Offset mortgages are a newcomer to the competitive mortgage loan market. In fact, in the UK, it is estimated that offset mortgages will make up 25% of the total mortgage market by 2005.
The concept is simple; the interest on your mortgage is reduced by the combined funds in both your savings accounts and your current accounts. This means that the more funds you have in your savings account, the less interest you pay on your mortgage, helping you repay your mortgage faster and more cheaply. Part of the deal with the financial institution is that you do not receive any interest payments on your savings or current account instead. This, in a nutshell is an offset mortgage.
With increased competition among banks, building societies and specialist lenders, financial institutions are finding innovative ways to keep customers loyal to them and are offering more innovative lending tools and terms to borrowers. One of the outcomes of this fierce competition has been the evolution of offset mortgages.
One added characteristic many banks are offering is the additional bundling of other debts, such as credit cards and personal loans into the offset mortgage. This allows you to repay all your debts at the mortgage rate, which is most likely lower than the interest rates on your other borrowings. An added bonus is that credit cards and other loans remain as unsecured loans, although they are being paid off at the lower mortgage rate, but without the risk of using your home as a security.
Many consumers prefer the offset mortgage to other vehicles, such as current account mortgages, where all debts and accounts are incorporated into one account, making it look like you have one massive daunting overdraft. The offset mortgage on the other hand keeps your savings and current account and other debts in separate accounts, even though they are all linked together and working together to lower your mortgage interest. Many people find this safer and easier to deal with.
The kind of people that find offset mortgages most cost-effective are those with volatile incomes, such as the self-employed or salespeople that get paid in large bonuses or lump sums. Also, those with large savings will find offset mortgages beneficial, as there is no need to tap into their savings or tie up their savings in a long-term mortgage, but still reap the benefits a lower mortgage rate.