Could an Offset Mortgage Work for You?
As with any financial product, offset mortgages come with an array of potential upsides and downsides. Deciding whether the pros outweighs the cons is a simple of matter of understanding how such a mortgages work, and if they provide a good fir with your own financial circumstances. So, here’s all you need to know to make an informed decision.
What Exactly is an Offset Mortgage?
An offset mortgage combines your savings account with your mortgage in a way that could allow you to make substantial savings on the amount of interest you’ll end up having to repay.
This is because the outstanding amount of your mortgage (on which interest is payable) is offset by the sum of your savings. So, to give a simple example, if you have $200,000 left to pay off, and $50,000 put away in savings, you’ll only accrue interest on $150,000 of the mortgage.
As a mortgage is such a long term commitment, the money you could potentially save on interest over the years may well add up to a substantial sum.
So, What Are The Downsides?
As you are using your savings to ‘offset’ the interest on your mortgage, they do not earn any of their own interest. (Figuring out if this trade off is worthwhile isn’t quite as simple as just comparing the two rates, more on which later.)
This means you’re losing a source of income, or rather making the choice to use it all on ‘offsetting’ your mortgage. This makes sense if that’s your priority, but not if you have another intention for your savings.
In addition, offset mortgages are flexible, allowing you to make payments as and when it suits you, but, they tend to have higher interest rates than their alternatives. So, if you don’t have enough free capital to offset the rate, aren’t planning on paying it off early, or just don’t have the freedom to make the use of its flexibility, it could end up costing you.
Then Why Choose an Offset Mortgage?
Normally, interest earned from your savings will count towards your income as far as the taxman is concerned. This means you will lose a cut of this money, and, depending on what else you have coming in, it might even end up being taxed at an above average rate.
By choosing an offset mortgage, you save on interest you’d have to pay on your mortgage, rather than earning interest for yourself. As a result, you’ll save on your tax bill, and could end up much better off, especially if you would have used the interest from your savings to pay off your mortgage anyway.
As mentioned above, offset mortgages are very flexible. This makes them a great option if you receive a lot of your pay in irregular instalments- if bonuses make up a large part of your income, for example.
Finally, there are usually no penalties for early repayment, which is another huge plus if you’re looking to own your property out right as quickly as possible.
George Baxter writes finance guides on a wide range of topics, from the suitability of various mortgages, to the best credit cards to use whilst on vacation.
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