Offset mortgages and remortgages
Whichever type of mortgage is selected, the lender will charge interest and there will be an overall cost to the borrower. The cost of borrowing will vary depending upon the requirements of the lender; for example, there may be a setting up fee, administrative fee, reservation fee and usually there will be valuation and legal fees to be met. A more attractive interest rate could be available for a larger deposit Mortgages with fixed rates of interest tend to have larger "up front" fees than other mortgages.
Flexible Mortgages have become popular in recent years. They allow a flexible approach to payments particularly suited to self-employed borrowers with irregular income. They allow overpayments and payment holidays, which coupled with daily interest charging can reduce the interest costs. They also provide a cheque book for further borrowing, within agreed limits, without the need to make an application, with the mortgage deed worded so that further advances will automatically take priority over any other registered charges.
Offset Mortgages are an extension of the flexible mortgage and are also known as current account mortgages. With an offset mortgage the borrower would have their savings accounts with the same institutions as the mortgage. The interest received on the savings is then offset against the interest due on the mortgage loan.
For example, if a borrower had an interest only mortgage for £150,000 at an interest rate of 5.5%, the monthly interest would be £150,000 x 5.5%/ 12 = £687.50. With savings of £15,000 receiving interest at 4.5% in a standard savings account, that would equate to £56.25 gross, or £45 net of savings rate tax. By offsetting the £15,000 savings, the borrower pays interest on £150,000 - £15,000 = £618.75. Therefore, the saving is £687.50 - £618.75 = £68.75 less the net interest they would have received in a standard saving account is £68.75 - £45 = £23.75. Instead of savings accounts the borrower can use their current account to offset against the mortgage with the interest being credited once the monthly earnings are received, reducing as bills are paid or cash withdrawn.
This may all seem very complex but don't worry use a mortgage broker with experience can be invaluable in helping you to navigate through the different lenders and deals. A good mortgage advisor knows all the processes involved and can help you through each step.