Offset mortgages explained
With interest rates remaining low, you might want to consider an offset mortgage. This combines your mortgage and savings into one account and, rather then pay interest on the savings, the savings balance is deducted from the loan amount and you pay interest on the remaining balance.
Advantages
- As you’ll owe less in interest, you’ll effectively be overpaying, which means you could pay your mortgage off early and save money on mortgage interest payments
- You maintain access to your money, should you need it
- Deals can be flexible and allow you to offset savings and current accounts against your mortgage
Disadvantages
- You won’t earn interest on the savings held in your linked account.
- If you don't have much saved, you won't save much on the mortgage, meaning it may be better choosing an alternative deal with a lower interest rate
- Offset mortgages are usually more expensive than standard deals
- Your choice of offset mortgage may be limited as not all lenders offer them
Why choose an offset mortgage?
Taking out an Offset mortgage enables you to use your savings to reduce your mortgage balance and therefore the interest you pay on it. For example, if you borrowed £200,000, but had £50,000 in savings, you would only be paying interest on £150,000.
Usually linked with one bank account (but sometimes more), an Offset Mortgage allows the money in your savings account to be counted as temporary overpayments towards your mortgage. However, you can still access your savings if you need to.
When is it worthwhile?
If you have a mortgage rate that’s higher than your savings rate (after tax), you may find yourself better off by offsetting – even if you don’t have a high savings balance. An Offset mortgage may be more appealing if you’re a higher rate tax payer. As there’s no savings interest paid on the money in an Offset savings account, there is no tax liability.
Offset mortgages can offer real financial benefits if you have a mortgage and some savings. By seeking professional advice, you’ll get a clearer picture as to whether it’s the right choice for you.
To discuss your mortgage needs, please get in touch.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Your home may be repossessed if you do not keep up repayments on your mortgage.
