Question
I have paid off the mortgage on my house and was thinking of taking out an offset mortgage in case I ever need a substantial lump sum of cash and was surprised when the Bank I asked about this said they needed to know what I intended to do with the money, as they only advanced money against the house for certain specific purposes such as home improvements or purchase of a car.
I thought an offset mortgage was more like an overdraft, and one could take up to your agreed maximum loan to value any time you wanted within the term of the mortgage and could pay back however much you want any time within the term?
Can you briefly explain how an offset mortgage works please.Answer
This surprises me too, as how you spend your money isn't really your bank's business. My guess if they'd prefer you to spend the money on your house as it increases the value of the asset against which they loan the money, but I've not heard of them actually stipulating this before. And, in any case, provided the bank agrees to a sensible loan to value (of your property) then they should be more than covered in any case.
Your definition of an offset mortgage is spot on. If you have an outstanding mortgage then you can use savings to offset the balance owed (normally via a linked current/savings account), reducing your monthly interest payments (which effectively equates to tax-free interest). Or, as in your case, if the mortgage is already paid off the offset mortgage acts like a big overdraft facility that usually benefits from far lower rates of interest than other forms of borrowing.
I'd try speaking to some other lenders who hopefully won't impose such a draconian condition. Or, provided you don't have to sign anything to the effect, simply tell the lender you spoke to you intend to spend the money on home improvements - banks are constantly economical with the truth to their customers, so why not play them at their own game.
I have paid off the mortgage on my house and was thinking of taking out an offset mortgage in case I ever need a substantial lump sum of cash and was surprised when the Bank I asked about this said they needed to know what I intended to do with the money, as they only advanced money against the house for certain specific purposes such as home improvements or purchase of a car.
I thought an offset mortgage was more like an overdraft, and one could take up to your agreed maximum loan to value any time you wanted within the term of the mortgage and could pay back however much you want any time within the term?
Can you briefly explain how an offset mortgage works please.Answer
This surprises me too, as how you spend your money isn't really your bank's business. My guess if they'd prefer you to spend the money on your house as it increases the value of the asset against which they loan the money, but I've not heard of them actually stipulating this before. And, in any case, provided the bank agrees to a sensible loan to value (of your property) then they should be more than covered in any case.
Your definition of an offset mortgage is spot on. If you have an outstanding mortgage then you can use savings to offset the balance owed (normally via a linked current/savings account), reducing your monthly interest payments (which effectively equates to tax-free interest). Or, as in your case, if the mortgage is already paid off the offset mortgage acts like a big overdraft facility that usually benefits from far lower rates of interest than other forms of borrowing.
I'd try speaking to some other lenders who hopefully won't impose such a draconian condition. Or, provided you don't have to sign anything to the effect, simply tell the lender you spoke to you intend to spend the money on home improvements - banks are constantly economical with the truth to their customers, so why not play them at their own game.
Read this Q and A at http://www.candidmoney.com/askjustin/767/how-do-offset-mortgages-work
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