Fancy Paying Off Your Mortgage Early
Fancy paying your mortgage off early?
The benefits of offset mortgages particularly for the self employed are frequently advertised so let's look at exactly what is meant by an offset mortgage and the potential benefits to you:
There are 3 ways an offset mortgage can be set up:
One account - an overdraft facility the size of your mortgage, your current account, savings and mortgage are all in one account,
Separate accounts – the balances on your current accounts, savings accounts and even your business account are deducted from your mortgage amount before interest is calculated,
A linked savings account alongside your mortgage – the interest you would have earned on these savings is paid into your mortgage as an overpayment each month.
Once you have decided on the combination that suits your lifestyle and needs best, the next option is how you want your offset to work.
Many lenders offer the ability to offset to reduce the monthly payment on your mortgage, to reduce the balance on your mortgage or to reduce the term. The main difference is as follows:
If you are offsetting to reduce your monthly payments then the balance on your savings is deducted from the balance on your mortgage and interest is charged on the difference.
By offsetting to reduce the balance on the mortgage any interest earned on the current account or savings accounts is paid into the mortgage account effectively making a second payment each month. Your payments remain static each month so the balance on the mortgage reduces quicker. Offsetting to reduce the term work in much the same way as the balance decreases quicker as the term gets shorter.
Over the last few years the number of offset mortgage products available has increased dramatically and so has the features they offer. In the current climate the criteria has changed and restrictions in lending policies can make offset mortgages look unattractive. However you are now able to fix your rate, link your business and personal accounts, and you can even link your cash ISA's. You retain instant access to your savings and as technically you are not receiving interest on these savings you cannot be taxed on it!
An example of how this could work for you:
Using an offset:
You could reduce the term by 6 years 6 months and save £121,419.63 in interest.