Do you despair of the low-interest rates your savings are attracting and wish you could put them somewhere where they will work harder for you? Then offset mortgages may be a consideration.
What are offset mortgages?
This is a mortgage product that is unlike the more traditional home loans, as any savings you have can be used to offset the mortgage balance – thereby saving you on mortgage interest charges.
For example, if you have a mortgage of £250,000 and savings of £60,000 (which, with some providers, can include any ISAs you have), the actual mortgage balance that you may typically be charged interest on will be £190,000 – giving you the chance to potentially save thousands of pounds over the mortgage term.
Apart from the obvious interest-saving benefits on your mortgage, there are additional benefits associated with your savings themselves:
- Rather than your monies earning a relatively low rate of interest in a savings account, they are working harder for you by helping reduce your mortgage balance
- You are making yet more savings, as you are not paying income tax on your savings. This could be a lot, with a tax on savings interest (outside an ISA) paid at 20% for a basic rate taxpayer or 40% if you are a higher rate taxpayer.
Not only this but your savings are not locked into your mortgage account. If you make overpayments on a traditional mortgage, you are not always able to get the money back if you need it.
With offset mortgage accounts, you can access your savings anytime you want, without restriction.
What you need to know
- All your savings accounts and the offset mortgage need to be with the same provider
- Some providers will take into account your current bank account balance, too (as long as the bank account is with them)
- Offset mortgages can either be fixed rate or variable rate – the standard variable rate on an offset mortgage tends to be slightly higher than it would be if you had a traditional mortgage. This means you need to make sure that, overall, having an offset mortgage is still the most cost-effective option for you, by looking at how much your savings would earn away from an offset mortgage, etc.
How is my monthly repayment amount calculated?
The monthly repayment amount will either be based on the outstanding balance as it is (so, in effect, you are overpaying each month, allowing you to repay your mortgage quicker).
It will be based on the outstanding mortgage balance less the savings amount – thereby giving you lower monthly repayments.
Are offset mortgages for everyone?
While anyone can apply for an offset mortgage, they may not always offer the most appropriate mortgage solution. That is why it is important to seek specialist advice from a mortgage expert who can look at your own unique financial circumstances and see what mortgage product most suits your requirements.