Also known as an all-in-one mortgage, an offset mortgage is a financial instrument that makes it possible to pool the balances of a collection of accounts in order to obtain a lower rate of interest. This mortgage type is widely available in the United Kingdom, as well as a few other countries around the world. Since the beginning of the 21st century, a few banking institutions operating in the United States have introduced mortgage plans that somewhat resemble this model. Just about any type of interest bearing financial instrument can be included in the mortgage arrangement, include a conventional mortgage, a savings account, and a current account.
Offset mortgages function by aggregating the balances that are found in all the associated accounts. For example, an offset mortgage in the UK may include a mortgage and a savings account. The money currently in the savings account is set against the current remaining balance due on the mortgage, thereby reducing the total amount of indebtedness that is assessed for interest purposes. As a result, the borrower pays a lower amount of interest over the life of the mortgage, assuming the balance in the savings account remains more or less constant.
There are several situations in which an offset mortgage may be particularly effective. People who are self-employed and experience some degree of fluctuation in their monthly income levels find the ability to add balances to various accounts and reduce interest rates make it easier to keep up with mortgage payments. In the UK and some other countries, there is also a tax advantage, since the interest generated in savings and other interest-bearing accounts is not deemed to be income, and thus is not subject to taxation. The approach also encourages adding to the savings on a regular basis, which only helps to strengthen the financial well-being of the debtor.
While an offset mortgage is an excellent choice for some, it is not the ideal solution for everyone. Anyone who finds it difficult to maintain balances in interest-bearing accounts that can be used to offset the interest rate on the mortgage is not likely to receive much in the way of benefits. The measure also requires the debtor to establish all the necessary accounts with a single financial establishment, a move that may distress those who prefer to maintain active accounts with more than one financial institution. For this reason, anyone considering the possibility of an offset mortgage should look closely at how much benefit would be derived from the arrangement before assuming it is the best option for buying real estate.
