What Is Offset Banking?
Offset banking has been one of the great success stories of the British financial services market over recent years. It's something of a revolutionary concept in banking and finance which gives much greater control to the customer, giving them the chance to maximise every area of their finances. But what exactly is it?
The Concept Of Offsetting
In essence, offsetting allows you to set your assets against your debts, so reducing the amount of interest you have to pay. Clear as mud? Let's take an example.
Say you have a mortgage of £100,000 and savings of £10,000. You could keep your savings in a savings account, earning interest at a rate of, say, 5%. However, if you can offset your savings against your mortgage, effectively combining the two, you're left with a net mortgage debt of £90,000.
And, So What?
Most mortgages will cost you more than your savings can earn. In the above example, lets assume your mortgage rate is 6%, for the sake of argument. Instead of earning interest on your savings at a rate of 5%, you're effectively avoiding paying interest on your mortgage at a rate of 6%. The net result is your money is working harder for you, and you can either reduce your mortgage payments or clear the debt more quickly.
But how is this different from paying off some of your mortgage with your savings? The beauty of offsetting is that it's only a temporary financial calculation rather than a real movement of money. Should you need to access your savings at any time, you still can. Of course, your effective mortgage balance will rise back up again, but in the meantime you could have saved a lot of money in interest charges.
It's Not Just About Your Mortgage!
Mortgages are usually used as an example of offsetting, as they are the largest financial commitment most people make in their lives, but the idea of offsetting can be applied to almost any form of financial service: credit cards, personal loans, current accounts, savings accounts... all have the possibility of being used in an offset environment, and there are many products on the market that allow you to do just that.
