How to Offset Mortgage Debt to Reduce Interest
An offset mortgage allows you to reduce the amount of interest you pay on a mortgage by using a linked savings account. Interest is paid on the outstanding mortgage minus the current balance in the savings account. Though you may not receive interest payments on the linked account, the bank offsets the interest on the mortgage by making money on the savings account. The effect is similar to making additional payments on a mortgage while gaining the flexibility of being able to withdraw the extra money from the savings account at any time. Get this type of mortgage when initially purchasing your home, or on a refinance.
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Instructions
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Contact your bank and ask whether they offer an offset mortgage product. Not all lenders offer the offset mortgage, so you may have to call several nearby banks to find one that does.
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Meet with a bank representative to fill out the application and await approval for an offset mortgage. Once approved, you will receive the mortgage--open a linked saving account, sometimes called a “current” or “mortgage” account.
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Make monthly mortgage payments as normal.
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Make extra payments to the saving account when possible, to maximize the benefit from an offset mortgage. The more you put in the savings account, the less interest is paid on the mortgage. When the savings account and remaining mortgage balance are equal, you will be paying no interest at all.
At that point, you may wish to withdraw money from the savings account to pay down the actual mortgage, divert your extra payments to the principle or withdraw money in savings that is above the principle.
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Keep any money in the linked savings account when the mortgage is paid off. You can now invest this money however you would like.
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References
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