Choosing a mortgage can be incredibly difficult, especially in the current economic climate. There are many things you need to take into consideration before you take out a mortgage, and you need to make sure you make the right decision as it can have such a massive impact on your financial future.
The types of mortgage
Essentially there are just two types of mortgage, repayment and interest only. A repayment mortgage involves repaying the amount borrowed with the interest.
An interest only mortgage is exactly how it sounds as each mortgage payment is used to pay off the interest only. In the case of an interest only mortgage, the homeowner will have to find an alternative funding method in order to pay off the actual cost of their home.
Before you decide which type of mortgage would be right for you, you need to know how much you can afford to borrow and repay. You can use a clever little financial tool like a mortgage calculator to do this. There is a mortgage calculator on MoneySupermarket.com that can do the job.
One clever way people are using their cash to work for them and their mortgage is by utilising an offset mortgage. So what is an offset mortgage and how can it help you?
What is an offset mortgage?
Offset mortgages allow you to reduce the amount of interest you accrue by using your savings. In simple terms, you will pay less interest on your mortgage debt as you don’t have to pay interest on any linked savings that you have.
For example, if you have a mortgage of £150,000 and you have £50,000 in savings, you will only have to pay interest on £100,000 which will help you to pay off your mortgage quicker.
What are the advantages of an offset mortgage?
The main advantage of an offset mortgage is that you can pay off your mortgage quicker due to the reasons mentioned above.
For example, if you take out a repayment mortgage of £150,000 over 25 years priced at 2.08%. The monthly repayment amount would be £635.78. However, if you hold £50,000 in a linked savings account then you only pay interest on the remaining £100,000.
As a result you would save around £6,799 in interest payments and you would finish paying off your mortgage over three years earlier than normal.
So based on the above, do you think an offset mortgage is right for you?