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Offset Mortgages

It pays to save, especially when it comes to Offset Mortgages.

You could make your money work harder for you by opting for an offset mortgage. Read on to find out more about how these work. 

What is an Offset Mortgage?

An offset mortgage is where you use the cash in your current or savings account to reduce the interest charged on your mortgage, and therefore reduce the overall cost of the mortgage loan.

It works like this; the borrower takes out an offset mortgage and current or savings account with the same lender. Funds that are held in the linked account are then charged a daily rate of interest for the money that is outstanding on the mortgage loan. For example, if you had a mortgage of £160,000 and you had £30,000 in an offset savings account, you would only be charged interest for £130,000 of the total loan amount.

Essentially the funds act as a temporary overpayment on the mortgage loan. However, you still maintain access to those savings, should you need to withdraw the money.

Who Is Eligible for an Offset Mortgage?

• Offset mortgages are great for people who have thousands in savings and who may be able to overpay on their mortgage. For example, employees who are likely to earn significant bonuses for good performance, as well as higher-rate taxpayers.
• Self-employed borrowers may also be drawn to offset mortgages, if they need to keep funds aside to pay tax bills, or they need to invest in their business in the medium term.
• Those who want to either reduce the overall length of their mortgage term, or lower their monthly repayments, may be suitable for a loan of this type. Provided they meet a lender’s criteria, of course.

How is an Offset Mortgage Repaid?

There are several options when it comes to repaying your offset mortgage. You can choose to repay at a fixed rate for a certain period, or get a discounted offer, or a tracker rate offset mortgage. Read more about these repayment options in our Guide to Mortgage Types.

Let’s Look at an Offset Mortgage Example:

Jeremy earns commission as a successful insurance salesman. He has £20,000 in savings and an offset mortgage loan for £160,000, over 25 years. Under the terms of his mortgage agreement, he pays interest on £145,000. His mortgage has a rate of 3%. Under this agreement, Jeremy could choose to reduce his mortgage term to 18 years and 8 months. His mortgage also gives interest savings of £57,722, which is how much money he would not be charged for the mortgage, by offsetting his savings instead.

What are the Benefits of an Offset Mortgage?

• Offset mortgages are great for self-employed people, who may need to keep money by to pay tax bills, or they may need to access the money periodically, to invest in their business. Rather than receiving interest on which you would pay income tax, by offsetting, you reduce the net interest charge on your mortgage, at the gross rate.
• You may save more on interest payments than the funds would earn, if they were placed into a normal savings account instead. This means your money may work harder for you, by giving you the option to pay your mortgage off faster.
• You may not pay tax on the interest savings within an offset mortgage account, however you may have to pay tax on the interest earned if you were to put your money in a normal savings account.
• Offset Mortgages are flexible; in some deals, you can choose to overpay some months or take a payment holiday. You can also reduce your monthly repayments as an option or draw down the money you have already paid.
• In some offset mortgage agreements, you can link your savings to a family member’s mortgage and aid them in securing their first home, without having to ‘gift’ them any money. They can benefit lower payments or a shorter term and the offset mortgage holder still retains control of the funds.
• If you had a wealth of savings, you could make a large overpayment on your mortgage. But you never know what’s around the corner. With an offset mortgage, your savings are within your reach. So if you need an emergency cash-boost, you can dip into your savings while the rest still offsets your mortgage interest rate.

What are the Pitfalls of an Offset Mortgage?

• Typically, offset mortgages offer less competitive rates than other mortgage types, such as base rate tracker and fixed rate mortgages. Many offset mortgages offer variable rates, which means your interest rate could rise.
• Your savings do not earn interest and it is often the case that you will need to have a significant amount of money saved for the deal to be (in some cases) available, as well as beneficial to you.
• This mortgage type is not for those who are averse to risk or uncertainty. It is recommended you only apply if you are confident that you will have the funds in place at the end of the term.

What are the Alternatives to Offset Mortgages?

If you have a large pot of savings and you need to buy a house, it may be beneficial to use this as a deposit. That way you can access a lower LTV mortgage deal.

If you are looking to help another family member get on the ladder you could try looking at our Guarantor Mortgage Guide.

Offset Mortgages offer you flexibility and access to your savings. If you would like to find out more about taking out an Offset Mortgage, get in touch with an independent mortgage advisor now.