Definition
An offset mortgage is a type of home loan where the borrower’s savings account is linked to the mortgage. The savings balance is used to reduce the amount of interest charged on the mortgage. For example, if you have a mortgage of $200,000 and savings of $20,000, you only pay interest on $180,000.
Key Takeaways
- An offset mortgage is a type of mortgage that links your savings and, in some cases, your current account with your mortgage. Instead of earning interest on your savings, that money is used to reduce the amount of interest you pay on your mortgage.
- Offset mortgages help to reduce the cost of your home loan and can make your mortgage payments more manageable. This can mean you are able to pay your mortgage off sooner. This type of mortgage is particularly beneficial for those with large amounts of savings.
- One potential downside of an offset mortgage is that your savings will not grow due to lack of interest. Your savings are being used to reduce your mortgage interest instead. So, it’s essential to consider whether this is the best use of your savings, especially if you have other debts with higher interest rates.
Importance
An Offset Mortgage is a crucial financial term because it suggests a flexible method of mortgage repayment where a borrower can balance their savings against their mortgage debt.
The importance of this term lies in its potential to save significant amounts of money on mortgage interest and expedite the process of home ownership.
This method comprises linking your savings, and sometimes your current account, to your mortgage.
Instead of earning interest on your savings, the money is set against your mortgage, meaning you pay less interest on that debt.
Therefore, the unique configuration of an Offset Mortgage can lead to substantial savings and quicker mortgage repayments, providing advantages in terms of time, money, and financial management.
Explanation
An offset mortgage is a specialized type of mortgage designed to aid borrowers in utilizing their savings to reduce the overall cost and timeline of their mortgage repayment. The primary purpose of an offset mortgage is to use a borrower’s savings to ‘offset’ against their mortgage debt.
This means that rather than earning interest on the savings, the money is set against the mortgage, reducing the amount of interest paid on the mortgage itself. In essence, it functions as a way for borrowers to get more value out of their savings by using them to reduce their mortgage expenses rather than letting them sit in a standard savings account.
This way, the money saved can be used to reduce the overall interest charges and shorten the mortgage term. An added benefit of an offset mortgage is the flexibility it offers, as borrowers can still access their savings at any time if required.
However, withdrawing savings will reduce the offsetting benefit.
Examples of Offset Mortgage
The Smith Family: The Smith family uses an offset mortgage for their home. They have a mortgage loan of $300,000 and keep about $50,000 in their offset account regularly. This allows them to only pay interest on $250,000 of their mortgage loan instead of the full amount, which significantly decreases the amount of interest they pay over time.
ABC Corporation: ABC Corporation has office buildings with sizable mortgages. It also has a large amount of cash on hand from recent profits. Instead of investing this cash into uncertain markets, the company decides to use it in an offset mortgage account. Thus, although their loan size is in millions, the substantial cash holding offsets much of the debt, making the interest payments much lower.
Jane’s Rental Property: Jane owns a rental property with a mortgage. She also has a significant amount of savings on hand. Instead of keeping it in a low-interest savings account, Jane places majority of her savings into her offset account linked to her mortgage loan. By doing so, not only can she access these savings whenever she needs them, but the savings also offset her mortgage debt, reducing the amount of interest she needs to pay.
FAQ Section – Offset Mortgage
What is an Offset Mortgage?
An offset mortgage is a type of mortgage where the interest is calculated on the difference between your savings and mortgage balance. The money saved is ‘offset’ against the mortgage debt, hence reducing the overall interest charged on the mortgage.
How does an Offset Mortgage work?
In an offset mortgage, your savings account is linked with your mortgage account. Instead of earning interest on your savings, the money is set against your mortgage. Therefore, you will only need to pay interest on the remainder of your debt, significantly reducing the mortgage term and overall amount repayable.
What are the benefits of an Offset Mortgage?
The primary benefits of an offset mortgage are possible significant reduction in mortgage term and interest rate charges. With an offset mortgage, there’s also flexibility to overpay, underpay, and draw back on overpayments.
Who can benefit from an Offset Mortgage?
Offset mortgages can be a great idea for people who have savings but are frustrated by the low savings interest rates. Also, these types of mortgages are beneficial for higher-rate taxpayers because they do not pay tax on savings that are offset against their mortgages.
Can I still access my savings with an Offset Mortgage?
Yes, one of the major benefits of an offset mortgage is that the savings are not locked away. You’re free to add, withdraw or transfer funds without any restrictions.
Related Entrepreneurship Terms
- Equity
- Interest Rates
- Overpayment
- Savings Account
- Home Loan Principle
Sources for More Information
- Investopedia: This is a reliable site covering a variety of finance terms and topics, including offset mortgages.
- Money Advice Service: This is a UK-based organization providing free and impartial money advice.
- MoneySupermarket: A leading price comparison website which provides information and comparisons for many financial products, including offset mortgages.
- Which?: An expert consumer rights website, delivering both information and advice on a multitude of topics, including finance and offset mortgages.
