Offset Mortgages - Finally Explained Simply And Concisely!

Australia is where offset mortgages were born out of, and they caught the attention of British markets some 14 years ago. And they're such a great idea. Your mortgage has a savings account linked to it, so that as you save the savings get paid off the mortgage to shrink your mortgage balance. Your savings are essentially offset against your mortgage hence the name - offset mortgage.

Offset mortgages first appeared in the UK in 1997 after being developed in Australia (indeed, they were often called 'Australian mortgages' on their launch). The simple idea of an offset mortgages is that your mortgage is linked to a savings account. When you have a balance in your savings account it reduces your mortgage balance, meaning more of your monthly payment goes to repaying what you owe.

This where the 'offset' in the name comes from, you're offsetting your mortgage with the savings from that account. The major attractiveness of these mortgages is the fact that you can save thousands in interest payments as you pay chunks off from your savings account, with the tagged on bonus your mortgage is paid off at an increased rate. Still with me then?

Offset Mortgages are restricted to any class of people, anyone can apply for one as an alternative to a fixed rate or interest only mortgage. However, if you work in a bonus/commission based profession, your needs and finances will be the best fit for an offset mortgage, as the extra cash from these commissions and bonus can be placed in the savings account. Helping you pay off the mortgage exponentially faster than a 'normal' mortgage.

Many offset mortgage contracts will allow you to make overpayments and even at times underpay. It's important to remember though that if you underpay or take a payment break, you'll be slightly extending the term of your loan, although this is essentially not so important on an offset mortgage as the rest of the time you'll be reducing it.

Most standard mortgage contracts don't allow overpayments, so for allowing you the privilege of this you will usually not earn any interest on money sat in the savings account linked to your mortgage. Instead, the payments just come off the balance of the mortgage whenever you want them to.

Another nifty feature is that you can use your current account to offset the mortgage too on some products, so if you've still got disposable income later in the month you can also use these funds to shrink the mortgage down rather than having money sat doing nothing in the bank. Makes sense really!

Now for a few of the major downsides, the savings account which is also set up will, in most cases, not be able to earn interest. The reasoning you will hear behind this is that the lenders are already allowing you to overpay on your mortgage without penalty costing the lenders thousands of pounds in lost interest over the life of the mortgage.

Offset mortgages are increasing in popularity in the UK. Whilst offset mortgages may only have accounted for under 10 per cent of all home loans in the past, a spokesperson at the mortgage broker London and Country believes that offset mortgages are now closer to 15 per cent of the overall mortgage market.

If you are unsure at all about whether an offset mortgage is right for you, it might be a good idea to talk to a financial advisor or a mortgage broker. These are experts who can present the various borrowing options to you and give you a clear idea about the likely costs and benefits.