What is an offset mortgage and is it for me?

What are the benefits of an offset mortgage?

Published: January 2, 2019 risks-with-secured-loan-property-assets-collateral-finance

An offset mortgage can help you to save money on your mortgage by enabling you to either shorten the term so that you become mortgage-free sooner than you would normally be, or by reducing the amount needed for your monthly repayments. We take a look at how they could save you thousands of pounds.

How does an offset mortgage work?

When you take out an offset mortgage the lender enables you to link your savings account (and in some cases your current account) to your mortgage. Your savings are ‘offset’ against the value of your mortgage, so you will only pay interest on your mortgage balance minus your savings balance.

Your savings are not actually used to repay any of your mortgage, they are just linked to it to save you interest.

For example, let’s say you have a mortgage of £250,000 linked to a savings account that has a balance of £20,000. In this case you would only pay interest on £230,000, not £250,000. Over the term of the loan, this could save you thousands of pounds in mortgage interest payments.

It can save you money in one of two ways as you could choose to either:
1. Use the saving on interest to reduce the monthly payment amount you will be asked to pay each month
Or:
2. Pay off your mortgage sooner by offsetting your savings against the balance of your mortgage, which will cut down the amount of interest you would otherwise be charged

What are the pros and cons of an offset mortgage?

Offset mortgages offer a lot of advantages and they have few drawbacks to them:

  • The chances are that you will save more interest than you would earn from a savings account
  • There is no tax to pay on the mortgage interest you save, but you would have to pay tax on the interest you would have earned from cash in a savings account (although savings in a cash ISA are not taxed). This makes this type of mortgage particularly attractive for higher rate taxpayers
  • You would still have access to your savings, but if you made a withdrawal, your mortgage payment may go up
  • You would have a choice of either finishing your mortgage sooner, or making lower monthly mortgage repayments

However, your savings would no longer earn interest. This means that their value would probably not keep pace with inflation as your savings would lose their spending power and not be able to grow because they would not earn interest.

Are offset mortgages flexible?

They offer a highly flexible way of purchasing a home. You are able to withdraw your money from the savings account if you needed to without giving notice. On the other hand, if you wanted to, you could put as much money as you could afford into the savings account until the amount in it (the balance) was the same as what you owed on your mortgage, then you could ask to pay off the mortgage in full.

If needed, you could even choose to take payment holidays on your mortgage or underpay on it if you had added enough money to your savings account.

Is an offset mortgage right for me? 

This will depend entirely on your personal circumstances. If you happen to have a decent amount of savings, an offset mortgage may well be suitable for you. But if you do not have a lot of money put by, this may not be the mortgage for you.

Should I switch from a standard mortgage to an offset mortgage?

You would need to compare the interest rate that you are paying with your current mortgage deal with the rate you would be paying with an offset mortgage. Feel free to ask one of our brokers how much you could save in interest. It is worth asking Loan.co.uk for help in working this out, as the amount of interest that you will save will be heavily influenced by the amount of money that you are able to put into your linked savings account.

You would also need to find out if you would have to pay an early repayment charge to your current lender for ending your mortgage earlier than originally scheduled, as depending on how long you have had the mortgage, the penalty could be substantial.

If you are considering an offset mortgage, it is particularly worth talking through your options with a mortgage broker as this type of loan is more complicated than standard mortgages, the different lenders have different lending criteria, and it does take some tedious calculations to see the size of the saving you could potentially make.