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Is Offsetting Your Mortgage The Answer?
If you are a high earner; you have substantial savings; you have just been given a large bonus; or have won a tidy sum on the lottery or premiums bonds, an offset mortgage could be for you.
So what exactly is an offset mortgage? Although people think that offset mortgages are a new concept, they have been around for quite a while now. Basically, you have a savings account that is linked to your mortgage account.
However, you do not earn interest on your savings. The money is used to reduce the balance of your mortgage. As an example, if you had a £150,000 mortgage with £20,000 in the savings account, you would only accrue interest on the £130,000 portion.
And the smaller your debt, the quicker you can pay it off. Many people are taking years off their mortgage term and saving thousands of pounds in interest.
Here are some rough figures to explain it.
If you had £20,000 in a savings account paying 5% AER, you would earn £1,000 in gross interest over a year.
At the same time, a £150,000, 10-year interest-only mortgage at 6% would cost you £90,000 in interest. By using the £20,000 to offset the loan (effectively making it a debt of £130,000) you would only pay £78,000 in interest, saving yourself £12,000 in interest repayments!
So why aren’t more people doing this? Until recently, the rates for offset mortgages were undesirable. But now, with rates falling, they are becoming more attractive. And with many lenders now including an offset option alongside their conventional mortgages, it is anticipated that more people will take them out.
An offset mortgage could be for you, but do your calculations carefully. And remember, you will need to be disciplined and not touch any of the money ploughed into the offset mortgage otherwise it will defeat the object.
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