In the nineties and early noughties, offset mortgages were all the rage. Their popularity decreased over the years, but recently they’ve been in demand again. Could this be the comeback of offset mortgages?
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
What is an offset mortgage?
An offset mortgage lets you connect your savings account to your mortgage so that you can “offset” the balance in your savings against your mortgage.
Your savings total acts to reduce the overall amount of your mortgage, and interest is then charged on the reduced total. You are not using the money in your savings to repay your mortgage, it just helps save you on interest.
Here’s an example:
Your mortgage is £150,000 with a 3% interest rate and you have £15,000 of savings. Your savings offset your mortgage balance so that the new total that you pay interest on is now £135,000. This saves you £450 a year!
Benefits of an offset mortgage
An offset mortgage is actually more cost-efficient than merely leaving your money to sit in a savings account to earn interest. These days, interest rates are rock bottom, and even if you are earning interest on your savings, it may still be subject to tax. And you would still be down the extra money you missed out on saving by offsetting your mortgage.
There are two ways that offset mortgages can make it possible to reduce the interest you pay:
- Help you pay less overall on your mortgage by reducing your monthly mortgage payments.
- More commonly, you can reduce the loan’s term.
Everyone’s needs will be different so carefully consider which route you’d like to go in and find the one that’s right for you.
Rise in popularity
So why has this type of mortgage been in demand more recently? As with many things in the last year or so, the pandemic is to blame.
Lockdown restrictions had a pleasant side effect of allowing households to increase their savings. If you were lucky enough to stay employed throughout the year, you might have been able to increase your savings.
If you’d rather not invest your new-found savings because you’d like to use them in the near future, you could consider an offset mortgage when the initial term on your current deal runs out. Even if you want to hold onto the cash for something in the future, like a home improvement project or big purchase, keeping it in savings and offsetting your mortgage is a great idea to make your money work harder for you.
On the other hand, you might want your savings to work for you in a different way – perhaps you’d like to pay down/ pay off a big portion of what you owe so you’ll qualify for better mortgage deals.
Mortgage help
Dental & Medical Financial Services specialises in helping doctors and dentists through every stage of the mortgage application process. If you wish to gain a better understanding of the various types of mortgages available and which one is right for you, get in touch with one of our mortgage brokers today.
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