An offset mortgage is a mortgage which is linked to a borrower’s savings account(s) and the interest is offset against their mortgage.
So, say you had a mortgage of £800,000, but savings worth £200,000, your lender would only charge you interest on the difference of £600,000. This will fluctuate each month, depending how much you have in the savings account at the time.
The pros and cons of an offset mortgage
Offsetting your mortgage against your savings can be a fantastic way of reducing your monthly payments, because your interest payments are lower. They also mean you still have access to your savings throughout the mortgage term, it will simply affect your interest payment that month. It’s a very flexible option.
Offset mortgages can also be a savvy way of making tax savings. Interest earned on savings accounts is of course taxed; but with the offsetting technique, there is no tax to worry about. Given that the interest you are charged on your mortgage will generally outstrip anything you can earn on your savings, moving to an offset means you are essentially saving at your mortgage rate, tax free.
As a result, however, the savings account will no longer provide a strong investment vehicle as the interest earned will be negated.
Another potential negative is that interest rates on offset mortgages tend to be higher, so if you don’t have that much in savings, it might not be the most cost-effective way of securing a mortgage.
Is an offset mortgage my best option?
If you have considerable savings, an offset mortgage can be an excellent option. Furthermore, for higher rate taxpayers it works well as the savings made on the mortgage will not be tax deductible.
Offset mortgages can work well for families wishing to help out their relatives, as it relieves the financial burden. Parents, for example, can use their savings to offset a mortgage for their child, but still have access to their savings account at the same time as reducing the amount of interest their child will have to pay.
How can Enness help with offset mortgages?
We recently completed on a case which is a good illustration of the potential benefits of an offset mortgage.
We secured a million-pound loan for the client. He planned to use £250,000 to purchase a buy-to-let property, but did not yet have one in mind; the search could therefore potentially have become very expensive.
Luckily, we were able to put the £250,000 into an account, where it was offset against his mortgage. He was thus free to look for a property unconstrained by the fear of racking up huge interest bills.
If you are thinking about getting an offset mortgage, it is important to contact a broker who can talk you through all your options and ensure you find the best possible deal. Give us a call or use the link below to get in touch.