Offset mortgage refers to the mortgage that is linked to the savings or current account of the borrower. Basically, this account has to be held in the financial institution where the borrower has their Savings Account. This is a flexible form of the mortgage payment that is extensively used in the UK. The Bank can use the savings account to offset the principal amount due on the mortgage payment. This reduces the total interest the borrower is supposed to pay on the mortgage.
The bank implements a specific Credit Limit or the loan amount based on the financial position and savings balance of the borrower.
Now, the borrower’s savings account is not associated with interest. That means the bank gets the benefit of the positive returns on the total amount the borrower has held in the savings account. While the offset mortgage is common in different nations, it isn’t applicable to the United States.
It is quite useful for people who spend the most part of their Income in savings. The savings account you have combined with the mortgage will not qualify for interest. In other words, you won’t receive the interest payments on your savings account until you repay the Home Loan in full. As mentioned before, the savings accounts do not offer high interest. The maximum you could get from these accounts is 1-3 percent interest annually.
If you calculate the interest on the mortgage payments, then it is considerably higher than the interest bank pays you for your savings. Any amount you save from the mortgage interest payments will be considered as your net profit. By linking your savings account to the mortgage account, you could use the interest you get on the savings account for mortgage payments. The interest of your savings account is calculated on your total savings balance. Note that the individual can still access their savings account.
Make sure that if you withdraw money from the account, then the bank will calculate the total mortgage payment on a higher balance. The banks and financial institutions in the UK allow borrowers to link more than one savings account to the mortgage. In fact, many borrowers use the savings accounts of their families to reduce the principal amount. Let’s understand the concept with an example.
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Suppose the principal amount of your mortgage is INR 300,000. The bank has implemented an interest of 3% on the principal amount. You have a savings account at the same bank. You have INR 50,000 in your savings account and you haven’t withdrawn money this month. Now that you have the offset mortgage, the bank will calculate your next interest payment on INR 250,000, i.e. the principal amount minus your savings account balance.
Offset balance enables the borrower to make small payments while reducing the total balance on their mortgage quickly. Now that the borrower doesn’t have to pay the monthly interest on the mortgage, they can focus on paying the principal.