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An offset mortgage package links a new loan with one or more of your bank accounts. If savings rates are low and mortgage rates are high, an offset mortgage may increase your savings. In addition, the competitive rates allowed by lenders for these mortgages have made them popular among homeowners.
An offset mortgage is a loan package associated directly with your bank account. For an ordinary mortgage, a lender will calculate the monthly interest on the outstanding balance of your loan. On the other hand, for an offset mortgage, the lender deducts the sum in the account from the mortgage balance before working out the interest. For instance, if you borrow £100,000 for your home and have 20,000 pounds as savings, your lender will charge interest on £80,000. An offset mortgage can bring down the monthly payments to a reasonable level.
The low savings rates in the current market could make taking out an offset mortgage seem a sensible idea. It would be a financially viable option for homeowners to relinquish the interest accrued on their savings and consider an offset mortgage. A mortgage borrower may opt for a package which linksthe loan with multiple bank accounts, as well.
Another benefit of offset loans is that lenders offer these packages at attractive rates. Historically, a reasonable offset deal would be at least 0.75% higher than ordinary mortgages. Current lenders have reduced the margin significantly and have made available products which are only 0.1% higher than the conventional mortgages.
The deals are quite flexible. Your lender may not always hold your savings against the mortgage. You may access your money in the linked accounts, should you have a need for it. However, it is advisable to bear in mind that any savings on the mortgage repayments will reduce when you withdraw money from the linked accounts.
The savings in the accounts connected with the offset mortgage will not earn any interest, until you pay off the entire loan. If savings rates were to rise, an offset package would not be a wise deal. Your savings on the mortgage will not be substantial, if you do not have a sizeable amount of savings in your linked accounts. However, the current low interest rates on offset loans could still make it worthwhile to settle for a suitable package.