Offsetting
Saving Money With Offset Bank Accounts
Offset Bank Accounts have been a huge success in the UK since they were launched in 1997. They work in a different way compared to traditional bank accounts – offsetting allows you to set your assets against your debts, so reducing the amount of interest you have to pay on your debts.
The key to offsetting is savings. If your savings are small or intermittent, you may not be able to make the most of your Offset Bank Account. Most mortgage advisors suggest a borrower needs ten to twenty percent of savings to benefit from offsetting. For example, savings of £20,000 and a mortgage of £200,000. When you offset the savings against the mortgage, effectively combining the two, you’re left with a net mortgage debt of £180,000, and you only pay mortgage interest rates on £180,000. Therefore your money works harder for you because you can reduce your debt quicker. What’s more, offsetting is only a temporary financial calculation rather than a real movement of money.
Mortgages are usually used as an example of offsetting, as a mortgage is normally the largest financial commitment most people make in their lives. Nonetheless offsetting can be applied to almost any form of financial service: credit cards, personal loans, current accounts, and savings accounts. With Offset Bank Accounts, the interest rate charged on your credit card debt or loan is usually charged at the lower rate of the offset account. While Offset Bank Accounts have varied interest rates, the rate will be better than the average credit card interest rate, which is about sixteen percent.
Offset Bank Accounts with a mortgage are often referred to as offset mortgage accounts, for example, an offset tracker mortgage, comes with all the benefits of offsetting, while keeping track with the Bank of England’s base rate of interest. An offset mortgage allows you to keep all your accounts separately and it has similar attributes to a current account mortgage (CAM). Unlike an offset mortgage, a CAM combines all the debts and deposits into one account, any credit you have in the account is offset against the debt and shown as one balance.
One of the benefits with Offset Bank Accounts is the flexibility of the repayment options: overpayments, underpayments and payment holidays. The price for the flexibility comes in the offset mortgage rates, which are typically higher than those for standard mortgages. On the other hand, people who receive lump sums such as bonuses or dividends may find that the flexible repayment scheme counteracts the higher offset rates. An offset scheme may also suit self-employed people, who may receive money intermittently and would benefit from the chance to overpay and underpay as the needs arise.
More and more people are choosing Offset Bank Accounts and there are about thirty providers in the market. Many people with offsets repay their mortgage early, some by as much as eight years and eight months, and they still have their savings when the mortgage is repaid. So, if you are a saver with a mortgage, it’s worth looking into the range of Offset Bank Accounts available on the market.
Before you open any Offset Bank Accounts, it is important to consult with an impartial mortgage advisor to avoid any costly mistakes. A mortgage advisor will help you decide if offsetting is suitable for your circumstances. If it is, because Offset Bank Accounts have slightly different terms, the mortgage advisor will find one suitable for your circumstances.
About the Author
Eve Carle wrote the article ‘Saving Money with Offset Bank Accounts’ and recommends you visit http://www.offsetmortgagecentre.co.uk/offset-bank-accounts.html for more advice on offset bank accounts.
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