Offset mortgages allow you to connect your savings account to your mortgage so that you can “offset” the balance of your savings against your mortgage.
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.
You’re not actually using your savings to repay your mortgage, it just helps to reduce the overall amount left on your loan and then interest is charged on the reduced total. Is it right for you?
Obviously, the greater the balance in your savings, the more appealing an offset mortgage is for you.
Get an in-depth explanation of offset mortgages.
How do they work?
Offset mortgages will help you reduce the interest you pay throughout the life of the loan in one of two ways.
The most common way it works is by reducing the loan’s term, but it will also help you pay less overall on your mortgage by reducing your monthly mortgage payments.
Example
Let’s say your mortgage is £250,000 with a 3% interest rate and you have £25,000 worth of savings. By using your savings to offset your mortgage balance, you bring the total down to £225,000 so that you’re only paying interest on the new lower total, netting you a savings of £750 annually. You can make an additional repayment with this saving if your terms allow it.
It’s important to remember that you won’t earn interest on your savings if you have an offset mortgage, but there’s no need to be concerned because it’s actually more cost-efficient this way. Earned interest is still subject to tax, and savings interest rates will vary but are notoriously low. Plus, in the example above you’d be out of pocket by £750 each year by not offsetting your mortgage.
Who could benefit?
An offset mortgage might be right for you if you have a significant savings balance – a good rule of thumb is for your savings to equal 15-20% of your mortgage.
It could also be beneficial for people who receive hefty bonuses or are self-employed who usually set money aside throughout the year to pay their end of year tax bill.
Higher rate and additional rate taxpayers might be interested too because these individuals have no personal savings allowance and are essentially putting any interest they may have earned on their savings towards their mortgage – and it’s all tax free.
The downside to offset mortgages
First of all, an offset mortgage means you won’t be earning interest on your savings, not conventionally, anyway. It’s the trade-off for paying less interest overall on the mortgage. If you’re interested in the tax benefits that you gain from cash savings in ISA and personal saving allowances, an offset mortgage might not be right for you.
They’re also not hugely popular, which means there isn’t a lot of competition on the market. You may struggle to find terms you’re happy with and the providers that do offer these types of mortgages can charge higher interest rates. Compared to “best buy fixed rates” you could be paying 0.4-0.5% more, but compared to other mortgages, you’re only looking at about a 0.2% difference.
Contact us about your mortgage
If you think an offset mortgage might be right for you, contact a mortgage advisor today. We’ll be able to help you decide if it’s the right fit and assist in finding a great deal.
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