The Benefits of Putting Your Savings into a Mortgage Offset Loan

Posted by MoneySavvy on May 27th, 2010 | no comments home title

A savings account can make all the difference when you need money quick. But, the problem is getting the money there and keeping it there in the first place. You can help bulk up that savings account with mortgage offset loans.

What is a mortgage offset loan? This type of loan originated in Australia but became popular in the United Kingdom during the 90s. In simplest terms it is a mortgage loan that uses credit accounts to offset interest and lower monthly payments.

Here is how it works. You want to secure a loan for a house. The price is manageable but you could stand to catch a break. Let’s also say that you have money in your savings account. That amount of money is then applied to the price of the house to lower the total cost.

Interest is charged for the money that you borrow for anything. Well, instead of paying interest on the full amount and spreading it over thirty years (or however long your mortgage loan is for), you only accrue interest on the loan amount MINUS the amount of money in your savings account. Now, your monthly payment is lowered.

It sounds like a win-win and for most it is. But there is a caveat that you might want to be careful of. Since the loan is tied to your credit account, mostly savings, any fluctuations in the savings account amount can lead to fluctuations in your monthly mortgage payment.

With that said, there are many benefits to an offset mortgage loan. For one, it encourages saving. Everyone needs to save money: for retirement, incidentals or even a rainy day.

Without a cushion, you are living paycheck to paycheck and that can be scary. The more money you can contribute towards your savings, the more of a cost savings you will experience on your mortgage payment. It also encourages you to look at ways that you can budget around the house to find more cash.

Two, you can manage your mortgage better if you already know how to manage your money. For self-employed individuals, there are months when things are fat and then there are months when business is lean. You can use your savings to lower your mortgage payment during those lean months because you filled the coffers when things were going well. Now you can still pay your bills without getting into credit troubles.

Third, you can qualify for home loans easier than before. With a mortgage offset loan, your total loan amount is lower on paper so it’s like you are borrowing less. That looks good for you, especially if you are trying to get on your feet.

Mortgage offset loans have a number of benefits for the home owner. Be sure to read the fine print and become acquainted with all of the ins and outs of the loan before deciding if it is right for you.