An Offset Mortgage? What’s That?

An offset mortgage is one where the borrower can use their savings account to offset the interest on the mortgage. The borrower uses the interest earned in a savings account to pays off or against the interest arising from the mortgage.

What is actually happening is that the interest on the savings account will cancel out the mortgage interest, in part or in whole that the borrower has to pay on a conventional mortgage.

The idea of the “offset mortgage” originated in Australia. The idea caught on in and became highly popular in the United Kingdom. Once upon a time, the mortgage lenders only targeted the wealthy. Now, the mortgage lenders are broadening the market by offering this type of mortgage.

There are further implications to this type of mortgage: Because the borrower receives no the interest on his savings account, the borrower does not pay tax on the interest because the interest on the savings account has been used to pay off the mortgage interest. In the UK, many borrowers are in the high tax bracket and the borrower now save the tax on the interest.

In many cases, the borrower takes a mortgage up to ninety five percent of the price of the property. That means he has to have a down payment of only 5 percent. Due to competition, many mortgage lenders may offer a loan as low as eighty percent to the property value.

The interest on savings account is high enough to allow many mortgage lenders to repay any amount without mortgage penalty. In a conventional mortgage, the borrower pays mortgage penalties on any repayment over the maximum limit in order to repay the mortgage early.

The variations of an offset mortgage are increasing in numbers due to the competition with other mortgage houses. Mortgage lenders may even incorporate other debts in the account, meaning that the borrower can include personal debts such as credit cards and car loans.

The mortgage bank will link the mortgage and savings account into a single account, meaning that the borrower sees only one balance. This is more commonly known as Common Account Mortgage (CAM). Look at this example: A borrower takes a $300,000 mortgage and uses his savings account of $100,000 to offset the mortgage interest. This effectively means that the borrower only pays interest on $200,000.