Suppose you have a $100k mortgage and you find yourself with $50k of extra cash that you would like to have available if needed.
Scenario 1: you repay $50k of mortgage but have a $50k HELOC. You are paying for $50k less of mortgage, but if you need the money back you can take it (and, until you pay it off again, pay more on the mortgage).
Scenario 2: you put $50k into your mortgage-offset account. You are paying for $50k less of mortgage, but if you need to use the money you can spend it (and, until the money’s back in the account, pay more on the mortgage).
These do seem pretty close to equivalent, though I guess the HELOC involves more paperwork. I am in the UK and all I know about HELOCs is the term itself; am I misunderstanding how they work?
Ah, I see. Well, you get somewhat similar financial outcomes but you end up in very different positions.
As far as I understand mortgage offset accounts, the money in that account is yours. You are, effectively, a lender, and the mortgagor—a creditor. In the HELOC situation when you pay down part of your mortgage, that money is gone. Instead you get a second loan (and a second lien on your house) and now you’re the creditor while the bank is the lender. It is not your money.
Thinking about the situation in which your credit rating deteriorates and the bank pulls the line of credit should make the difference between the two scenarios clear.
I believe they are only a UK and an AU/NZ thing.
Having a home equity line of credit is the standard US equivalent.
Nope, a very different thing. In the mortgage offset accounts you effectively get paid your mortgage interest rate on your balance.
Suppose you have a $100k mortgage and you find yourself with $50k of extra cash that you would like to have available if needed.
Scenario 1: you repay $50k of mortgage but have a $50k HELOC. You are paying for $50k less of mortgage, but if you need the money back you can take it (and, until you pay it off again, pay more on the mortgage).
Scenario 2: you put $50k into your mortgage-offset account. You are paying for $50k less of mortgage, but if you need to use the money you can spend it (and, until the money’s back in the account, pay more on the mortgage).
These do seem pretty close to equivalent, though I guess the HELOC involves more paperwork. I am in the UK and all I know about HELOCs is the term itself; am I misunderstanding how they work?
Ah, I see. Well, you get somewhat similar financial outcomes but you end up in very different positions.
As far as I understand mortgage offset accounts, the money in that account is yours. You are, effectively, a lender, and the mortgagor—a creditor. In the HELOC situation when you pay down part of your mortgage, that money is gone. Instead you get a second loan (and a second lien on your house) and now you’re the creditor while the bank is the lender. It is not your money.
Thinking about the situation in which your credit rating deteriorates and the bank pulls the line of credit should make the difference between the two scenarios clear.