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The offset loan is similar to the current account loan, however, all the accounts are held separately rather than having everything in one account.
The offset loan concept treats the money as a giant pot, and each element, such as the savings, mortgage, current accounts are separate to the other. The result is generally a giant overdraft; however, it behaves differently.
In offset mortgages, the interest on the mortgage is reduced because of the funds in the savings and the current accounts. The more one has in his savings account, the lower is the interest to be paid on the mortgage. This helps in repaying the loan faster as well as more cheaply. The borrower does not receive any interest on the savings or the current account.
The interest is calculated by taking out the state of all accounts separately and then offsetting them against others so that the borrower can benefit from his savings as well as pay less interest. The current account loan also benefits similarly, except that it acts like a bank account and the salary goes into the account from which you have taken the loan.
This is different to a current account mortgage as the loan account is separate from the savings as well as income accounts that one opens with the same company. The income and the savings are offset against the mortgage similar to the current-account loan. The interest is calculated on a daily basis on the reduced balance.
These mortgages work by setting money that is held in the savings and the current accounts against the mortgage debt. Therefore, instead of earning the interest on cash balances, one pays less interest on the borrowings. The main idea of offsetting is the less interest a person has to pay; the loan is repaid more quickly and costs less as well.
These mortgages can also be linked to the other personal financial commitments as well as arrangements. The main attractions of these loans are the prospect of paying lower interest. All the other debts like credit cards and personal loans are linked into the rest of the products. This allows a person to pay back all his debts at the loan rate, which is supposed to be much lower than the rate on those borrowings.
Another advantage of the offset mortgage is that the credit cards as well as the loans remain unsecured borrowings, although they are paid off at the loan rate. Therefore, if one cannot make the repayments the property is not at risk.