How do current account and offset mortgages work?
A current account mortgage combines a mortgage
with one, or more, of the following:
- a current account,
- a savings account,
- a credit card and
- an unsecured loan
all within one account. This means that you
have all your credit balances offset against your debit balances,
with interest being charged on the net amount of debt
only.
An offset mortgage works in a similar way.
Each account is separate, but linked, so that credit
balances in savings accounts are offset against your
mortgage (debit) balances. This means that you are
charged interest on your net debt only.
So if you have a mortgage of £100,000 and
savings of £10,000 with the same provider, you will only be charged
interest on the net balance of £90,000.
The linked accounts you can do this with
vary between providers, but most will offer a current account, with
an overdraft facility and a savings account.
Some providers will permit you to have more
than one savings account, but unsecured loans and credit cards are
now a less common feature of offset packages.
As with traditional mortgages, offset
mortgages are available with fixed, tracker or discounted
initial interest rates.
One of the key advantages of offset
mortgages is that interest on credit balances is untaxed because
your savings are offset against the interest payable on the
mortgage, rather than you actually receiving the interest.
The flexilibity to make large one off
payments means that you can pay off an offset mortgage
much more quickly than a standard mortgage.
Who should consider offset banking/mortgages?
- higher rate taxpayers because they will save 40 per cent
tax which they would normally have
paid on savings interest
- individuals with significant levels of savings
- the self-employed and people who have fluctuating income (such
as intermittent income, commisions or bonuses) because the
flexibility of offsets allows them to manage their income
flows
- buy-to-let landlords because offsets allow them to manage their
portfolios more easily.
- any individual wanting the flexibility of offsetting
What are the advantages of offset banking?
Interest on credit balances earns untaxed
gross interest because any savings or salary that you pay into the
offset account is effectively being used to reduce your
mortgage debt.
This means that if you are financially
disciplined, it may be possible to repay your mortgage more quickly
than with a conventional mortgage.
Some lenders will permit friends or relations
to offset their savings against your mortgage as well, allowing
them to keep control of their savings, while reducing the interest
payable on your mortgage.
The interest rate applicable at the end of any
initial introductory period (known as the ‘revert to’ rate), is for
many current offset mortgages a tracker linked to a margin over
Bank of England base rate, which often compares very favourably
with the standard variable rate of conventional mortgages.
Another advantage of offsets is that if you
are committed to offsetting over the long term, you won’t face the
hassle or expense of having to remortgage every few years.
Offset mortgages come with flexible
features, such as permitting overpayments, underpayments or payment
holidays (but remember that some non-offset mortgages
also carry these features).
Other factors to consider
Interest rates charged on offset mortgages tend to be slightly
higher than for standard mortgages. This differential has narrowed
considerably in recent years and some lenders no longer charge a
premium for offsets.
Offset banking does not suit everyone and
there's no hard and fast rule as to who will benefit from it.