Offset mortgage? UK, Aussie, Canada, etc?

[puglogic]

I know that folks in Australia, the UK, and other places (anywhere but here in the U.S., essentially) are more familiar with "offset mortgages" than we are.

There's now a firm in the States that is offering these mortgages, but having been locked into the American mortgage machine mindset for so long, it still seems a foreign concept to me. The thought that I can use my savings to bring down the interest paid on my home loan is attractive, but I'm still looking for the catch.

Have any non-U.S. folks had an offset mortgage? Any idea what the downside might be?

[jennipurrr]

Is that the mortgage product that is essentially a HELOC where you dump money into it each month and then draw off it as you need to pay bills, etc? Sorry I am in the US and not sure if I am thinking of the same thing.

[Kevin]

Although it sounds great in theory - the interest you get on your savings offsets some of the interest you pay on your mortgage - the key thing to think about is the difference in interest rates that you can get between offset and non-offset mortgages and offset and non-offset savings. Offset mortgages would normally be more expensive and whether they are worthwhile depends on what you can get elsewhere.

The Money Saving Expert website has a handy calculator, where you can put in the rates for the different types of account, the amount of the loan, the period of the loan and so on, and it will calculate the net benefit (or not) of the offset compared with ordinary mortgages. It's a UK site, so it asks you whether you are a higher rate or basic rate taxpayer. That refers to your highest marginal rate of income tax, which is 20% for basic rate taxpayers and 40% for higher rate:

http://www.moneysavingexpert.com/mortgages/offset-mortgage-calculator

I thought about this when I decided to make a real effort to pay off my mortgage. I decided to move to a flexible mortgage that allowed me to pay off more than the minimum each month, then I massively overpaid when I could afford to do so. Interest was calculated daily, so I quickly saw the effect of this. Meanwhile I kept 3 months salary in a high interest savings account. It made sense at the time because of the interest rates that were available.

Kevin