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Combination Offset

June 28th, 2010 admin No comments

Combination Offset

A Discount Offset Mortgage Can Help in the Short Term

A discount offset mortgage is an offset mortgage with a discount on the standard variable rate (SVR) of interest for a set amount of time.

This article will briefly look at a standard offset mortgage, and then look at the difference a discount offset mortgage makes to the borrower.

An Offset Mortgage

An offset mortgage combines your main current account and/or savings account with your mortgage. The amount you owe on your mortgage is offset by the amount you have in your current/savings account on a daily or monthly basis. The more you have in the accounts, the less you pay on your mortgage, and vice versa.

A Discount Offset Mortgage

A discount offset mortgage works in the same way as a standard offset mortgage with your savings being offset against your mortgage payments, but there is a reduction on the SVR set by the lender. For example, the SVR may be 5% with a discount of 1%, making the initial interest repayment 4%. The discount rate lasts for a set period of time, and the amount of the discount and the term of the rate tend to be interrelated: a long term means a small discount on the SVR and a short term means a higher discount on the SVR. Some lenders also offer a ‘stepped discount’ where the discount decreases in two or three stages.

During the agreed discount period, the interest rate charged can go up or down if the SVR of the lender changes. Therefore, if the SVR goes up, your payments will rise and if the SVR goes down, your payments will decrease. The interest rate that you pay will always be reduced by the exact discount rate agreed at the start of the discount period.

Once the discounted term has ended, the mortgage interest rate changes back to the lender’s normal SVR. The SVR does not always change when the Bank of England changes the Base Rate. The reductions and increases in interest rates are left to the lender to adjust.

The discounted offset mortgage rate can be very helpful initially, especially for people who are looking to buy a home and need the extra money to make home-improvements or for other needs. However, the mortgage needs to be looked at as a whole: how much will your repayments be when the discounted period ends? Can you afford the higher repayments straight away? Hoping that you will get a pay rise or you’ll have a win fall from the lottery once the discount period has ended is not enough when applying for a discount offset mortgage. If you can’t make the higher payments than you are at risk of losing your home. Is there a penalty charge if you pay your mortgage off before the term ends? This is known as a redemption tie-in. The amount of the penalty is usually a percentage of the outstanding mortgage, and the earlier you opt out of the mortgage, the more you will have to pay. This could run into thousands of pounds, and some discounted deals have redemption tie-ins that extend past the initial deal rate period.

To avoid making expensive mistakes it is advisable to contact an independent mortgage broker. Around 70% of borrowers consult a financial advisor or mortgage broker and they will take into account your financial circumstances, plans, attitude to risk and other preferences, and help you decide if a discount offset mortgage is suitable for you.

Conclusion

A discount offset mortgage can be very beneficial for some borrowers. The discount runs for a set period of time, and then changes back to the normal SVR of the lender. Before taking out a discount offset mortgage, check the redemption tie-ins and how long the discount runs for.

About the Author

Stuart Youngman wrote the article 'A Discount Offset Mortgage can Help in the Short Term'and recommends you visit http://www.offsetmortgagecentre.co.uk/discount-offset-mortgage.html for more information on discount offset mortgages.