Offset mortgages are a way of using any of your existing savings to offset any outstanding mortgage balance – meaning you are only charged interest on the remaining mortgage balance.
For example, if you have a £250,000 mortgage balance, you offset this balance with £40,000 savings and are then only charged interest on the £210,000 outstanding balance.
It is a clever way of making your savings work harder for you.
Who offers offset mortgages?
Many traditional mortgage providers also have offset mortgages in their product range, some with different features and benefits. That is why it is important that if you are considering taking an offset mortgage, you do your research to see all your options available.
Alternatively, you can use the services of a specialist offset mortgage broker who will be able to access all the deals available and suggest the most appropriate solution for you.
How do these mortgages work?
Firstly, you need to have all your savings accounts with the offset mortgage provider to take advantage of this type of agreement.
The type of savings accounts that may be linked to the mortgage may vary – some providers will allow you to use your ISA balance to offset your mortgage balance along with your other savings accounts with them.
Others may allow parents to link their savings accounts to that of their children, and so on.
These savings accounts then offset part of the mortgage balance, meaning you’ll pay less in interest (as there is less debt).
How is the interest charged?
You may be charged interest either on the outstanding balance amount or the outstanding balance amount less the value of any savings.
Whatever option the mortgage provider offers, typically you will be saving money.
While your savings are offsetting your mortgage balance, they can still be accessed whenever you want – unlike the more traditional mortgages that often do not allow you to take out any overpayments you may have made.
How can offset mortgages save me money?
Potentially, you could save money by having an offset mortgage because:
- The amount of interest you typically may receive on your savings in a standard savings account will be around 0.5 – 1.5%. Using the same monies to offset the interest charged on your mortgage balance – typically, which may be around 2-4% – means your savings are working harder for you.
- Any savings in a traditional savings account will typically be charged income tax. If you use the savings to offset your mortgage balance, you will save money on your upcoming income tax.
Is an offset mortgage appropriate for me?
As with all financial matters, you must do your research. You may find that the interest rate on an offset mortgage is more than the rate on a traditional mortgage, so check that, overall, you are still making cost savings.
Because offset mortgages are different from traditional mortgages, and because the product features and benefits may vary depending on which offset mortgage product you select, it is advisable that you seek independent advice from a specialist offset mortgage broker. They will help you determine whether this type of home loan is the most suitable option for your unique financial circumstances.