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How to pay off a mortgage early

[ Posted May 29th, 2009 ]

Every borrower wants to pay off their mortgage early – and a loan product that may help you do this is an offset mortgage.

Many lenders are pushing offset mortgages in TV advertising, so here’s a guide on how the scheme works.

The mortgage product was launched in Australia and moved to Britain in the nineties.

Offset mortgages come in two types –

Current account mortgages

This links a borrowers income to their mortgage. Any income paid in to the account reduces the mortgage, and the resulting interest due.

As the borrower pays bills and spends are paid out through the month reducing the balance.

For example, if a borrower has a £120,000 mortgage and earns £2,000, at the start of the month the mortgage balance is £118,000.

The mortgage balance is calculated daily on the balance outstanding, so the more a borrower has in the bank, the less the mortgage payment.

Savings can also be paid in to reduce the balance further.

Savings account mortgages

The principle is similar to the current account mortgage. Instead of having separate savings and mortgage accounts, a borrower keeps them together in a single account.

The savings cancel out part of the mortgage, so if the borrower has £10,000 in savings and a mortgage of £200,000, interest is calculated daily on a balance of £190,000.

The savings can be increased or withdrawn at any time.

This is certainly worth considering for borrowers with savings in a low interest rate account because rather than earn little or no interest, the same money is cancelling out higher interest mortgage debt.

Some offset mortgages also include facilities for additional borrowing up to a certain level or credit cards.

How do they repay the mortgage early?

The offset principle reduces the balance at various times throughout the life of the mortgage and the amount of interest paid, so more of the the monthly mortgage repayment goes towards paying off the capital or amount borrowed.

This way, the borrowing is reducing quicker than a traditional capital and repayment mortgage.

Depending on how borrowers manage their accounts, this mean s years can be knocked off the mortgage term so the debt is repaid early.

Where can borrowers get an offset mortgage?

Lots of lenders have offset mortgages under different names for their own marketing purposes, but the principles behind each product are the same.

Find the best rates by searching a mortgage comparison site for offset or current account mortgages.

The lending terms for offset mortgages are much the same as those for other mortgages, so a first time buyer or a homeowner looking for a remortgage will have to meet the same qualifying criteria as for any other loan.

 
 
 
 
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