Offset Mortgages

Offset mortgages are a type of flexible mortgage that allow borrowers to reduce the interest charged by offsetting deposit accounts against the mortgage balance.

The key feature of an offset mortgage is the ability to reduce the interest charged by offsetting a credit balance against the mortgage debt. For example, if the mortgage balance is £200,000 and the credit balance is £50,000, interest is only charged on the net balance of £150,000.

Lenders normally set a credit limit at outset of the mortgage and allow borrowers to credit and redraw up to this limit. This limit may be periodically reviewed. The lender may place restrictions on the lending limits towards the end of the mortgage term with the aim of ensuring capital repayment. However many lenders allow full drawdown up to the end date of the mortgage where the loan must be repaid. This can cause great problems for undisciplined borrowers and those approaching retirement if the lender is unwilling to extend the term (especially on the grounds of age).

Some lenders have a single account for all transactions, this is often referred to as a current account mortgage or CAM.

Other lenders have multiple accounts. As a minimum there is a mortgage account and a deposit account. Often the lender allows multiple accounts for credit balances and sometimes for debit balances. These different accounts allow the borrowers to notionally split their money according to purpose whilst all accounts are offset each day against the mortgage debt.

While the specific features of various offset mortgages differ, some of the main features include:

• Offsetting - linking the mortgage deposit accounts
• Overpayments and underpayments
• Additional borrowing – to an agreed upper limit
• Payment holidays
• Daily interest calculations
• Portable – the mortgage may be transferred to another property
• Flexible repayment type – repayment or interest-only
• Flexible term of loan – usually from 5 to 25 years

Interest is usually not earned on the balance of the deposit account. Instead it is offset against the Mortgage balance in order to save interest.

This can help reduce income tax liability as tax on interest earned is charged at 20% in the UK.

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