An offset mortgage is very similar to a current account mortgage - but instead of having everything all in one account, all accounts are held separately.
The offset mortgage concept treats your money as one giant pot, with each element (mortgage, savings, current account etc) separate to the rest. The result is basically a giant overdraft, although it behaves differently.
Offset mortgages are where the interest on your mortgage is reduced by the funds in both your savings accounts and your current accounts. The more you have in your savings account, the less interest you pay on your mortgage, which helps you to repay your mortgage faster and more cheaply in the long term. Your part of the deal is that you don't receive any interest on your savings or your current account.
The interest is work out by taking the state of each account separately and offsetting them against the others so that you can benefit from your savings and pay less interest. A current account mortgage allows you to benefit in the same way, except it also acts a bank account so your salary goes into the same account that your mortgage is in.
This is slightly different to the current account mortgage because your mortgage account is separate from a savings and income account that you open with the same company. Like the current account mortgage, your income and savings are offset against your mortgage, which reduces what you owe. The interest is calculated on a daily basis on that reduced balance.
Offset mortgages work by setting the money held in savings and current accounts against your mortgage debt. So instead of earning interest on your cash balances, you pay less interest on your borrowings. The idea of offsetting is that, with less interest to pay, the mortgage is paid off more quickly and as a result costs you less.
Some of these mortgages can even be linked to your other personal financial commitments and arrangements. One of the main attractions of these mortgages is the prospect of paying less interest.
All your other debts, such as your credit cards or your personal loans are also linked into the nest of products, and this allows you to repay all of your debts at the mortgage rate, which is likely to be a lot lower than your pay rate on those borrowings.
A further advantage is that the credit cards and loans remain unsecured borrowings even though they are paid off at the mortgage rate, so if you can't keep up the repayments on those your home is not at risk.
The people that will find offset mortgages very suited to them are people with volatile incomes, such as the self-employed or people often paid in large bonuses. People with significant amounts of savings will also find offset mortgages useful.
If you do opt for an offset mortgage, especially one linked to a current account, you can maximise its benefits by keeping your cash in your account for as long as possible each month. With interest calculated daily, each day's credit balance can make a small difference.
The rate on an offset mortgage will be higher than the cheapest rates available.
The benefit of the offsetting feature is that you can always have access to your savings if you need them. So you can make them work to pay off your mortgage, and access them when you need to.
The advantage to the offset mortgage is that the feeling of being in debt is not as all encompassing as with a current account mortgage. However an offset mortgage is quite complicated and you need to make sure that your accounts are offset in the best possible way to benefit.
Wednesday, July 1, 2009
Freddie Mac receives additional $6.1 billion from government to help offset its liabilities
NEW YORK — Battered mortgage giant Freddie Mac received $6.1 billion in new funds from the Treasury Department to help offset its mounting liabilities, according to a regulatory filing submitted Wednesday.
The Federal Housing Finance Agency, which has been operating Freddie Mac since last fall, requested the funds for Freddie Mac after the mortgage firm’s liabilities exceeded its assets by more than $6 billion, according to the filing with the Securities and Exchange Commission.
After drawing the funds, Freddie Mac has now received $51.7 billion from the Treasury Department and still has access to an additional $149.3 billion to help it finance operations.
In early May, Freddie Mac said it would seek the additional funds to help offset its worsening books as it continues to hemorrhage cash amid the ongoing housing market downturn. It was the third time since Freddie Mac was taken over in September that it has requested funds.
The McLean, Va.-based company posted a loss of $9.9 billion, or $3.14 per share, for the quarter ending March 31. The results were driven by $8.8 billion in credit losses due to soaring delinquency rates and falling home prices, and $7.1 billion in write-downs of the value of its mortgage-backed securities.
Freddie Mac has been among the hardest hit financial firms, along with fellow mortgage guarantor Fannie Mae, amid the housing slump, credit crisis and ongoing recession. Mounting losses led to government takeovers amid concern the collapse of the mortgage companies would throw the housing market into further chaos.
Washington-based Fannie Mae and Freddie Mac play a vital role in the mortgage market by purchasing loans from banks and selling them to investors. Together, the companies own or guarantee almost 31 million home loans worth about $5.5 trillion. That’s about half of all U.S home mortgages.
The Federal Housing Finance Agency, which has been operating Freddie Mac since last fall, requested the funds for Freddie Mac after the mortgage firm’s liabilities exceeded its assets by more than $6 billion, according to the filing with the Securities and Exchange Commission.
After drawing the funds, Freddie Mac has now received $51.7 billion from the Treasury Department and still has access to an additional $149.3 billion to help it finance operations.
In early May, Freddie Mac said it would seek the additional funds to help offset its worsening books as it continues to hemorrhage cash amid the ongoing housing market downturn. It was the third time since Freddie Mac was taken over in September that it has requested funds.
The McLean, Va.-based company posted a loss of $9.9 billion, or $3.14 per share, for the quarter ending March 31. The results were driven by $8.8 billion in credit losses due to soaring delinquency rates and falling home prices, and $7.1 billion in write-downs of the value of its mortgage-backed securities.
Freddie Mac has been among the hardest hit financial firms, along with fellow mortgage guarantor Fannie Mae, amid the housing slump, credit crisis and ongoing recession. Mounting losses led to government takeovers amid concern the collapse of the mortgage companies would throw the housing market into further chaos.
Washington-based Fannie Mae and Freddie Mac play a vital role in the mortgage market by purchasing loans from banks and selling them to investors. Together, the companies own or guarantee almost 31 million home loans worth about $5.5 trillion. That’s about half of all U.S home mortgages.
Offset mortgages more popular as savings rates dwindle
Uptake of offset mortgages is rising as savings rates dwindle.
According to HSBC-owned lender, first direct, new offset mortgage business rose 16% in the final quarter of last year.
The firm asserts that swapping to this type of home loan can reduce the length of a £100,000 25-year mortgage by 33 months and save £18,322 in interest payments over the lifetime of the loan.
Offsetting does this by taking deposits into account in calculating monthly interest charges.
No interest is paid on the savings offset against the loan but at today’s savings rates the loss incurred can be easily made up by paying less interest on the mortgage.
first direct spokesman, Jimmy Kelly, comments: “Our research shows offset mortgage lending now accounts for £1 in every £10 being lent to UK mortgage holders, and is on course to reach a record share of new mortgage lending in 2009.”
However, the study revealed that many homeowners are unaware of the benefits of offsetting with 48% of those questioned not understanding the basic principle and 21% unaware that offsetting can save money.
According to HSBC-owned lender, first direct, new offset mortgage business rose 16% in the final quarter of last year.
The firm asserts that swapping to this type of home loan can reduce the length of a £100,000 25-year mortgage by 33 months and save £18,322 in interest payments over the lifetime of the loan.
Offsetting does this by taking deposits into account in calculating monthly interest charges.
No interest is paid on the savings offset against the loan but at today’s savings rates the loss incurred can be easily made up by paying less interest on the mortgage.
first direct spokesman, Jimmy Kelly, comments: “Our research shows offset mortgage lending now accounts for £1 in every £10 being lent to UK mortgage holders, and is on course to reach a record share of new mortgage lending in 2009.”
However, the study revealed that many homeowners are unaware of the benefits of offsetting with 48% of those questioned not understanding the basic principle and 21% unaware that offsetting can save money.
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