offset mortgages what are they?
This article discusses what exactly an offset mortgage is and how it may be of benefit to particular borrowers. Furthermore how it may save people money by effectively managing their resources to best reduce the amount of money they pay in interest on their various borrowings.
As mortgages go offset mortgages are pretty complex. Once we establish what they entail it will become apparent that although brokers say that they offer a full offset mortgage package to their prospective customers this is invariably not the case.
Offset mortgages are also known as flexible mortgages. Essentially an offset mortgage just ensures that all monies held by a client are kept within the same institution so that any credit interest can be offset against any debit interest that can be accrued on borrowings.
This can be explained quite easily with the following example: your mortgage is valued at 100000 and your credit card has a debit of 2000. Your savings are in credit to 20000. Basically with an offset mortgage the interest accrued on your debt is covered by the interest accrued on your credit, ie your savings. If you take it that the credit card is charging 19% and you owe 2000 on it, then the interest you gain on your savings is used to cover this.
Therefore the credit card would then be costing you nothing basically. Not only that, but the interest that you accrue on the other 18000 of your savings is used to cover the interest that is being charged on your mortgage loan.
This could have the effect of either just reducing the amount you pay each month or if you maintain your usual monthly payments to your mortgage and credit card it would result in your debts falling at a quicker rate than if you had your savings deposited at all.
I am often asked, does this mean I have lost my savings? Well the answer to this is No! Your savings are still there and in tact, all that has happened is instead of giving you credit interest on your savings the lender has offset the balance against your debts and charged you less in borrower interest than they would have done.
Another factor which would be of benefit to you is the fact that some brokers will tailor your policy so that you can use it in the same way as a current account. This means that when your wages go into your account each month the interest on your debts is reduced and along with it your borrowing costs.
The following example should help explain this. You have a mortgage valued at 100000 and your monthly salary amounts to 2000. If your salary is paid into your policy then this has the effect that, for however long it continues to do so, it will be deducted from the total amount you have borrowed for the purpose of calculating the interest on your mortgage. This may not seem like much if calculated on a month to month basis but when you calculate the amount you would save over a period of, say, five or ten years then the overall figure could be far more substantial than you might have thought.
As each individual has their own financial situation it will be up to yourself to assess whether obtaining a full offset mortgage would be the best option to suit your circumstances but if the answer is yes then my advise is to seek the assistance of a mortgage advisor who will be only happy to help.
Article Source: http://www.search-raven.com
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by: ChrisClare
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