Every Friday we aim to post an answer to a FAQ about mortgages, tax, investments, money matters, business or retirement. You can have your say too. Send an email with your FAQ to [email protected]
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.
Q: What is an offset mortgage?
Answer : An offset mortgage is a type of mortgage that 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.
For example:
Your mortgage is £150,000 with a 3% interest rate and you have £15,000 of savings. By using your savings, you offset your mortgage balance so that the new total that you pay interest on is now £135,000. This saves you £450 a year!
This is actually more cost-efficient than simply leaving your money sitting in a savings account to earn interest. Even if you are earning interest on your savings, the earned interest still may be subject to tax. And you would still be down the £450 you didn’t save by offsetting your mortgage.
This type of mortgage makes it possible to reduce the interest you pay in one of two ways. The first way it can help you pay less overall on your mortgage is by reducing your monthly mortgage payments. The other, more common way, is to reduce the loan’s term.
For a more in-depth explanation of this type of mortgage, read our article, which further explains offsetting a mortgage.
And 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.