“Refinance your home with an offset mortgage and pay off your mortgage early” – this is the marketing pitch used to sell these relatively new home loans. But while the idea is certainly an appealing one – after all, who doesn’t want to pay off their mortgage sooner; however, will these deals benefit the majority of mortgage holders? Offset mortgages are ideally for mortgage holders with significant cash in the bank. This is because they work by “offsetting” cash you have on hand against the balance of your mortgage, so you only pay interest on the outstanding balance, which in theory reduces your interest payments.
For example if you have borrowed $150,000 to buy a single family home, but have $15,000 in a savings account, you will pay interest on just the $135,000 balance. You do not receive any interest on your savings, but this is better with the interest you save on the mortgage. Banks charge far higher interest for borrowing money than they pay to people saving money. Also, most lenders will allow the balance in your current account, along with your savings, to be offset against the mortgage balance; meaning that every cent you have is working to reduce your mortgage balance from the start. The accounts used to offset your mortgage debt are called “linked” accounts, also you are free to withdraw and spend your money in these accounts at any time.
There are also tax benefits in springing for an offset mortgage. Interest earned on savings is subject to income tax; however, there will be no tax if your savings earn zero interest. This is particularly beneficial to higher rate taxpayers. It is worth remembering that there are a number of disadvantages to offset mortgages. The most obvious disadvantage is that conventional mortgages are more competitively priced.
Using this money to pay off a chunk of your conventional mortgage will save you more in the long run if you have a low interest rate mortgage. Make sure you have flexible terms, where there is no penalty for paying off the mortgage early. Some deals allow mortgage holders to pay off up to 10 percent of the balance a year without penalty. The downside of this is that your savings are no longer handy for a rainy day. Mortgage holders who have most to gain from the offset route are those with high but fluctuating bank balances.
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