Best Mortgage Deals
Advice, help, information and guidance on the best mortgage deals available

Best Mortgage Deals - Mortgages For The Cash Rich

best mortgage deals by AnnaYes I know, a bit of a contradiction in terms, but if you have cash in the bank in a current account or savings, then it's worth looking at specific products which offer some of the best mortgage deals.

There are several different types of mortgage available for those with cash in the bank, but in broad terms they all fall under the one term of an offset mortgage. In simple terms any savings are 'offset' against your mortgage, in theory offering you greater flexibility and lower repayments in the long term. Whilst offset mortgages account for around 10% of the market, they are often sold to those who don't actually need them, and who would actually be better of with a standard type of mortgage. So let's look at them in detail and whether this type will offer you the best of mortgage deals given your circumstances.

Best Mortgage Deals - Offset Mortgages

The principle of an offset mortgage is very simple. One of the key selling points of offsets is that if you take out an offset mortgage and have savings, you are in effect earning gross interest on these.

If your savings were in a savings account not tied to your mortgage, you would pay tax on this interest. Rather than being paid interest on your savings, the sums saved in these accounts will be used to reduce the interest owed on your mortgage and any other loans. Now there are two types, one where your savings are in a current account, and the other where they are held in separate accounts. Let's look at a simple example assuming your savings are in a current account.

Current Account Balance Mortgage
£10,000 £100,000
Your interest payments would be calculated on the mortgage of only £90,000. The balance is calculated daily and you only pay interest on the balance. Other debts such as credit cards, loans etc. can be added to the account, and the interest is again only charged on the overall balance daily.

 

Where savings are held in separate accounts, the mortgage works in exactly the same way and is simply linked in order to calculate the daily interest rates on the balance.

Best Mortgage Deals - Offset Repayments

With both types of offset mortgage, the borrower usually makes regular monthly repayments which guarantees that the mortgage will be repaid. The attraction of an offset mortgage however, is that with the savings reducing the amount of interest to be paid during the term of the loan, you are effectively overpaying your mortgage each month which can soon add up. Remember our repayment profile chart, then the sooner you can reduce the interest element of the mortgage, then the quicker you start to repay the capital. This is what an offset mortgage is doing in effect. Within limits, offset mortgages also allow you much greater flexibility in drawing off extra funds at any time without having to re-mortgage, and lump sum payments can generally be made at any time without penalty. So, are there any drawbacks?

Best Mortgage Deals - Offset Drawbacks

In principle, offset mortgages offer a good deal, and should be considered if you have savings or cash in the bank. However, there are three principle problems with them, which might not make them the best mortgage deals around. First, the interest rates will not be the most competitive and are generally slightly higher than for non-offset mortgages. Secondly you have to be disciplined and be fairly sure that the deposits will remain in the account for the long term. This is not a short term chop and change mortgage, but a long term plan, with long term benefits. If you can leave the deposits untouched for the length of the mortgage then this type of mortgage may have real benefits for you. Thirdly and most importantly, because of their flexibility, many lenders are tempted to simply borrow more during the life of the mortgage, which simply outweighs any benefits. Trust me, I've had one - it's very easy just to write a five figure cheque and add it to the mortgage!!

So there we are - if you are disciplined, and can leave your savings untouched for the longer term, and are not tempted to increase the mortgage, this could provide one of the best mortgage deals for you, otherwise a standard repayment or other type may well suit you better, with lower rates and the same flexibility, so choose with care - and be honest with yourself!

Now let's look at the world of re-mortgaging, and how to get the best mortgage deals here.

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