Colli Real Estate

(UK) one account mortgage – what are the catches??

My husband wants us to take out a one account mortgage. He reckons that you put your savings and income in there, your mortgage shrinks, say, to 3 years – then your house is completely paid off and you still have all your funds 100%intact. I have pointed out to him that this is to good to be true, and therefore probably isn’t. I have read through the info pack and there are a couple of contradications – the on-line calculator said we could shrink our mortgage to 3 years, and yet the info booklet says the one account mortgage term is for a minimum of 5 years, also, one paragraph says that you can withdraw your savings at any time, and then another paragraph says your savings / lumps sum payment have to remain in the account for the duration of the mortgage term…confused? we are – are then any financial gurus out there who can help to simplify things in a nutshell for us please?? – specifically the pros and cons of taking out such a mortgage and any pitfalls to watch out for.

There are many lenders offering the same type of product known as an offset account. The main feature is that any savings you have in the account are used to offset the balance of the mortgage. If you then continue to pay the same monthly amount, you are in effect overpaying and will repay the mortgage much quicker.

To answer the contradictions:
1. The minimum term you can set the mortgage over is 5 years. The five year or greater term you select is what your monthly repayments will be worked out on. However you could repay the mortgage or remortgage to another deal or company within that time. Just like most people initially take out a 25 year term mortgage but that doesn’t mean that they have to keep it for that period. You should however check for early repayment charges although most offset accounts don’t have any.

2. You can withdraw your saving at any time. The part about leaving them for the full duration of the mortgage is one of the assumptions used when showing how quickly you could repay you mortgage off using an offset. The saving are yours to take as and when but remember they can only reduce the amount of interest paid on your mortgage when invested.

The interest rate on this type of product is normally marginally higher than a standard mortgage so in order for it to be worthwhile you need to really have at least £20,000 savings to offset.

In the current climate of increased interest rates an offset can make a huge difference but you should also take into account that the savings aren’t earning interest. Basically if the interest rate on the mortgage is higher than your money would achieve in a high interest savins account then you are winning. In the current economic climate this is generally true so it is a good time for offsetting.

If you need anymore help just let me know.

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