Offset mortgage deals
Offset mortgage deals are widely advertised as a way for home-owners to pay off their debts ahead of time. Essentially savings are set against mortgage debt and over a 25 year mortgage, thousands of pounds can be saved. Mortgage borrowers with savings, however small, can use this money to cancel out mortgage debt.
Savers avoid paying tax on the interest that their deposits would have earned and, because offset mortgage lenders calculate interest daily, every pound on deposit works hard to reduce the cost of borrowing. In fact in a low interest rate environment, any savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay.
Some offsets allow a borrower to link current accounts and savings balances to the mortgage, while others just use a savings pot. In the simplest type of offset mortgage, deposits are kept in separate accounts or 'pots', but linked for the purposes of interest calculation. Any savings are offset against the loan and reduce the interest charged on the mortgage.
The first offset mortgage deals launched in the UK were current account mortgages (CAMs), which linked a home-owner's current account with the mortgage. With CAMs, the bank account and mortgage are combined so that customers view just one statement and see one balance. CAMs offer the same services as an ordinary bank account. Customers can also add any savings into the CAM account to reduce the debt balance. Any other debts, such as personal loans or credit cards, can be transferred to the account. The home-owner, typically, pays the same interest rate across the lot.