Should you be offsetting your UK home mortgage loan?

With UK interest rates expected to climb yet again, UK mortgage lenders are becoming ever more innovative with their home loan products in order to try and entice UK homeowners to move over and borrow from them. The latest in the UK home loan gimmicks is the offset home loan.

Although not strictly a new product offered by UK home mortgage lenders, the offset home loan has become so popular of late that Defaqto, the research group, estimate that approximately 30% of all UK homeowners will have some form of offset home loan product by the end of 2009.

The system itself works fairly easily. In addition to having a home mortgage loan you also have a regular savings account with the home mortgage lender. However, instead of earning interest on your savings account, the money in your savings account is used to set-off the amount of money you owe in your home mortgage account. The home mortgage lender will then charge interest on the lower, set-off, sum outstanding in your home mortgage account.

For example, if you have a home mortgage loan of £150,000 and a savings account of £20,000 rather than being paid interest on the £20,000 savings, this sum is off-set against the £150,000 home mortgage loan account so that you only pay interest on £130,000. The more you save, the more that is set-off. The more you repay on your home mortgage, the lower the set-off amount. As such, you should be in a position to repay your UK home mortgage loan much faster than more conventional home mortgage repayment loan products.

Although offsetting your home mortgage loan like this may seem attractive to all of us, this product is especially attractive to those on high incomes, who have to pay higher rate tax on the income they earn from their savings. By offsetting the interest they earn from their savings account against the interest they are being charged on their UK home mortgage loan account, high income earnings end up in a very attractive net position that should end up saving them thousands of pounds a year.

The real attraction to offsetting you home mortgage loan, however, is with high interest rates on high savings amounts. With interest rates now on the rise, and with projected increases in interest rates over the next six months, the offset home mortgage loan starts to look like a much more attractive home loan product than with low interest rates.

Nonetheless, UK homeowners should remain cautious about transferring to an offset home mortgage loan if they have outstanding debt elsewhere or if they have relatively low savings. Keep in mind that it can be a costly exercise to offset your UK home mortgage loan, which traditionally has fairly low comparable market interest rates, if you will then need to re-mortgage your home to repay your growing unsecured debt problems.

If that should be the case, it would be far more advisable that you repay your existing outstanding unsecured debt before you think about changing over to an offset home mortgage loan. However, if you are fortunate enough to have no outstanding unsecured debt and an excess of savings sitting around not doing very much for you, then an offset home mortgage loan could be just the ticket you are looking for if you want to find a way to repay your UK home mortgage loan quicker.

Richard Smith
12th October 2006

 

More Information:

• Why Does The Interest Rate Of Your Mortgage Change?
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• Joint Mortgages
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• Don’t Forget The Extra Hidden Costs Of Getting A UK Mortgage
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