Monday, November 7, 2011

The Offset Mortgage

The Offset Mortgage – Borrowing & saving at the same time

Suppose you’re borrowing $100,000 to buy a house and you have $40,000 in a savings account. Wouldn’t it be nice to pay interest only on $60,000 instead of $100,000?

You can do just that in the United Kingdom if the loan on your house is an offset mortgage.

Here’s how it works.

If the interest rate on your loan is 4.5%, you would be paying that rate on the full amount of your loan ($100,000) if you have a conventional mortgage. But if your bank offers an offset mortgage, you would pledge your savings account ($40,000) as additional security and pay interest on the difference ($60,000). So, not only would your savings account earn interest, you would also be “saving” 4.5% on $40,000.

Not bad these days of paltry interest on savings accounts.

But what if you need to use, say, $15,000 from savings? No problem. You simply withdraw the $15,000 and begin paying interest on $75,000 instead of $60,000.

Pretty slick. Makes you wonder why the offset mortgage isn’t offered here.

- Morrie Erickson