Offset Mortgages
June 2, 2009
Offset style mortgages were introduced into the UK by the Australians in the 1990s to give people more freedom in the way they paid off their mortgages. Until that time most people were resigned to paying their mortgage off over 25 years and indeed the system actively encouraged borrowers to do so. It was not until tax relief on mortgages was abolished, and most lenders stopped charging interest on an annual basis and moved to daily charges that the scene was set for more flexible mortgages.
At first the flexibility took the form of people paying their mortgage more often, say on a weekly basis rather than on a calendar month basis and seeing this process shaving years off their mortgages. Then the lenders, who were mostly Banks in this area of lending, encouraged people to use the balance in their current accounts to be offset against their mortgage. In practise this meant that if you had a £100,000 mortgage and £10,000 in your current account you would only be charged interest on £90000. So if you were already paying your mortgage down on a weekly basis based on the original £100,000 loan you would be paying your mortgage off even quicker.
It would have been reasonable to think that offset mortgages would have become a mainstream product due to their obvious advantages as highlighted above, but I feel that up to now they have not taken off in a big way. I believe that the main reasons for this are that they can be complex. This is because when borrowers are attaching their mortgage to their current accounts it takes good organisational skills to keep track of were they are, and the progress they are making in paying off their loan. Also, offset mortgage providers have been charging higher rates than on their conventional products, and have generally not been offering fixed rates on their mortgages. This excluded borrowers who want security of payment.
Fortunately I believe the market is changing and lenders are beginning to offer better rates, with fixed rates at last being featured. Also lenders tend to now offset with an account linked to their mortgage rather than a current account, making the process simpler and more transparent. It could also be argued this is an account designed for credit crunch Britain. It allows the cash strapped lenders to draw in savings on the back of mortgages and for borrowers, particularly the higher rate taxpayer, it makes more sense to offset your savings against your mortgage than accept the meagre savings rates on offer. For example a higher rate tax payer receiving 3% on savings rates will nett down to1.8% after tax, so unless their mortgage rate is less than 1.8% offset makes sense. It could be argued that if you have savings and no plans for spending it to just reduce your mortgage balance rather than use offset. Again this may have been good advice in better times but at the moment it may be advisable to keep money in reserve as a financial cushion, as it may not be so easy to borrow back money you have paid off. This could be due to a change in circumstances or a change in the lenders borrowing criteria.
Offset mortgages may be right for you but it is a complex area and it is worth taking advice from an Independent Financial Adviser who specialises in mortgages. Kieron Bassett Financial Services have two IFAs. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.
