An offset mortgage is an option for those who have savings that they’d like to use to reduce their mortgage interest payments. Here, we share what an offset mortgage is, how it works, what the pros and cons are, and whether it’s the right choice for you.
What is an offset mortgage?
An offset mortgage enables you to offset the amount of interest you’re charged on your mortgage by using the same lender for your mortgage and savings. Your savings will be kept in an offset account by your mortgage lender and you won’t pay interest on that amount. This means that the more you have in your savings, the less interest you’ll pay for your mortgage each month.
How does an offset mortgage work?
An offset mortgage works by your lender taking the value of your savings off of the amount you’re borrowing and only charging interest on what’s left. For example, if you were borrowing £100,000 and put £10,000 into an offset savings account, you’d only pay interest on £90,000 of your mortgage. This could result in you paying 10% less interest overall than you would if you didn’t have an offset mortgage.
As with repayment mortgages, you can usually overpay if you wish, which would reduce the amount you owe interest on even more. Typically, you can overpay by 10% every year but this differs between lenders. Ensure that you know how much you can repay as overpaying could result in an early repayment charge. Depending on your lender, you’ll be able to take payment holidays too. During these, you won’t make your full mortgage payment but will still be charged interest.
What are the pros and cons of an offset mortgage?
The main reason for taking out an offset mortgage is that you’ll be able to lower your monthly mortgage repayments by reducing the amount of interest you’re paying, which is ideal for those with high outgoings elsewhere. However, if you’d like to pay off your mortgage quicker, it might be more beneficial to use your savings to increase your mortgage payments or make an annual overpayment based on what you can afford. You’ll also find that fewer lenders offer offset mortgages, so your options may be limited.
In most cases, you will be able to add to your savings, or withdraw from them if required, which means that you don’t have to worry about your savings being inaccessible should you need them. This provides peace of mind to those concerned that they may have an unexpected bill in the future. If you top up your savings, you’ll reduce the mortgage amount that you’re paying interest on even further. If you withdraw some of your offset savings, your monthly payments will increase to reflect this. The fact that your savings are accessible could be a negative as you may be tempted to dip into them and this could outweigh the benefits of this particular mortgage option.
By choosing an offset mortgage, you could end up saving more interest than your savings would earn sitting in a savings account, and you won’t have to pay any tax on the interest that you save. It’s worth keeping in mind that your savings won’t earn any interest while in an offset savings account though. The interest rates you do end up paying for an offset mortgage could be higher than rates charged for a repayment mortgage too, so, as always, you should speak to a mortgage advisor to find out which option would be best for you and your circumstances.
Is an offset mortgage right for me?
If you have savings and want to reduce the interest you pay on your mortgage, an offset mortgage could be the right choice, especially if you want to be able to access your savings. If you’re not concerned about accessing your savings, it might be a better option to put your savings towards your deposit as this will reduce your mortgage term and is likely to secure you a better interest rate too.
For more advice and help on offset mortgages, contact our team of mortgage advisors today!