Questions and Answers for Offset Accounts UK Consumers

What are Offset Accounts? UK consumers have been asking this question more and more in recent years.

They combine your mortgage with your current and savings accounts, and sometimes your loans and credit cards. Interest earnt on your deposit accounts is offset against your mortgage interest. Offset accounts are a useful tool for mortgage reduction because they reduce the amount of interest payable on your mortgage. For example, if you had a £100,000 mortgage with savings of £10,000 you'll only have mortgage interest repayments on £90,000 and you don't receive interest payments on the £10,000.

Why don't I receive interest on my deposit accounts?

The interest earnt on your deposit account is immediately offset against your mortgage interest repayments and is not taxed, therefore offsets are tax effective. For example, a £100,000 mortgage with an interest rate of 6% will cost you £6000 per year in interest payments with a standard mortgage. Whereas, with an offset account and savings of £10,000, you'll pay interest on £90,000 and the interest repayments would be £5400. Your £10,000 investment has saved you £600. It would be difficult to find a safe investment for £10,000 which gave you this sort of tax-free return.

Do I need to have a lot of money in savings?

Most experts advise you should have ten to twenty per cent of the mortgage loan in savings to give the best return on offsetting.

I have a significant amount of debt; will this be a problem with Offset Accounts?

Some lenders suggest you can consolidate your debts with the mortgage. However this tends to lengthen the term of the debt and it also becomes a secured loan. Have a look at your spending habits because you will need to make regular repayments and where possible to make overpayments to get the most out of an offset account – otherwise an offset may not be suitable for your circumstances.

How flexible are Offset Accounts?

Not all offset accounts are the same and it is important to research the intricate details of the loan conditions. However, most offsets have the overpayment option without incurring fees. Once a set amount of overpayments have been made, then you can normally make underpayments or have a payment holiday as the need arrives. Offset accounts are a clever way of making your money work harder for you, if your circumstances are appropriate.

How many types of UK Offset Accounts are there?

There are two different types of offset accounts: current account mortgage and offset mortgage.

Do they work in the same way?

They work in slightly different ways. With a current account mortgage, your deposit and mortgage are combined into one account and your salary is paid into the account. You have one net balance for your deposits and debts. An offset account keeps your savings and borrowings in separate accounts. The total of the savings is offset against the total of the borrowing and the interest is calculated on the net figure.

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Offset mortgage

If you own a home and have some savings, then an offset mortgage could make your savings work for you – and save you a lot of money. An offset account is one of a new kind of mortgage that offers flexibility to homeowners. Borrowers' minds are focused on whether now is the time to switch to a new mortgage. And as offset homeloans become steadily more popular, it could be time to weigh them up alongside all the fixed rates and trackers.

With an offset mortgage, you can use the balances in your current account or savings (and even your ISA – Individual Savings Account), to reduce the amount of interest you pay on your mortgage and even bad credit mortgage, or maximize the interest you earn on your savings.

Offset mortgages can offer the following benefit options for your choice:

• Shorter Term - the potential to pay off your mortgage early to gain greater financial freedom sooner

• Lower Payments - lowering your monthly mortgage payments to increase cash flow

• Reduced Debt - reducing the amount of interest paid over the term of your mortgage and bad credit mortgage and gradually lowering your mortgage balance over your chosen mortgage term.

There are two basic types of offset deal. The first offset mortgages launched in the UK were current account mortgages (CAMs), linking a homeowner's current account with the mortgage. Britannic Money's CAM was first, launched in 1997, followed closely by Virgin One, now called The One account run by Royal Bank of Scotland.

The second type of offset is where the deposits are kept in separate accounts or 'pots', but linked for the purposes of interest calculation. Providers include Barclays and Woolwich, Intelligent Finance (IF), Egg, First Direct, Newcastle building society, Northern Rock, Standard Life and Yorkshire building society. With these, as with CAMs, borrowers pay interest only on the mortgage, minus savings.

Remember that your savings won't earn any interest while they're offset, but because they don't earn interest, they're not subject to tax which makes the Offset mortgage tax efficient too.

Interest rates on offsets have traditionally been higher than those on normal home loans, partly because they are more expensive to administer. However, this "offset premium" has fallen recently, as more lenders enter the market and competition increases. As a result, offsets are becoming more appealing to ordinary borrowers and less restricted to niche markets such as self-employed professionals. As demand for offsets especially for offsetting bad credit mortgages grows, more lenders will feel they have to offer them. These new entrants will put further downward pressure on the interest-rate premium, creating a virtuous circle of improving competitiveness. Already there is hardly a premium on some deals.

Offset mortgages provide consumers with the ability to manage their own repayment structure by allowing overpayments and underpayments. If you are disciplined and manage the mortgage correctly, you could see your mortgage term decrease sooner. If you are undisciplined, you could face some unexpected financial problems. It is important to seek independent financial advice to make sure that this is the right mortgage for you.

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