Offset mortgage interest rates have dropped below two per cent as product numbers dwindle, making them cheaper than the average standard two and five-year fixed rate deals on the market. Historically rates have been much higher than the standard mortgage deals.
Moneyfacts’ analysis reveals that although the number of available offset mortgage deals has dropped from 210 to 95 in a year, those lenders that continue to offer offset options have cut rates.
What is an offset mortgage?
An offset mortgage is a mortgage which is linked to a savings account. The balance on these savings are then used to reduce the interest charged against the mortgage (thereby saving money), as opposed to a ‘conventional’ mortgage in which interest is charged against the total borrowed amount. The savings balance is not actually used to repay a mortgage but ‘sits’ alongside- essentially as a provisional ‘over payment’- while also allowing customers to dip into their account as and when the need arises.
How else can I benefit from an offset mortgage?
An offset mortgage can also offer customers the choice between paying back the borrowed amount over a shorter term or making lower monthly payments. This is because mortgage payments are based upon the full loan amount (as opposed to the offset amount), which means that borrowers are actually overpaying each month and thereby reducing the length of time it takes to pay off the total. Indeed, depending upon the total offset savings amount, your mortgage term could be cut by months or, even, years.
Alternatively, if you wish to save money in the short term, your lender may allow you to adhere to the standard terms of the mortgage, thereby reducing your monthly repayments.
Pros
- Helps you retain a flexible degree of access to savings.
- The interest saved will invariably exceed the amount that can be earned from a savings account, especially with interest rates at a historical low.
- Give you the possibility of paying off a loan at a quicker rate than with a standard mortgage or to make lower monthly payments.
- Certain offset mortgages will allow you to link up to ISA accounts along with traditional savings accounts.
- You can reach the threshold in savings interest without having to pay tax.
Cons
- You won’t see any interest from your savings account.
- Not as many lenders offer offset mortgages and they do vary from lender to lender, use an independent mortgage adviser to make sure you get the best deal
- If you take money out your savings then your mortgage payments may increase
- Payments on the mortgage may increase if the borrower makes a withdrawal from their offset savings.
- In many cases the linked savings account and mortgage will need to be with the same provider.
If you are thinking about an offset set mortgage, please do get in touch. As independent mortgage advisers we have access to the whole of the intermediary market which means you will get the best mortgage deal based on your individual circumstances.
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