What is an offset mortgage? The concept is quite simple. The idea is that your mortgage is linked to one – or sometimes several – savings accounts, and offset against them. Every month, when your lender calculates what you owe based on the total amount you borrowed, they will only charge you interest on the difference between your mortgage and your savings.
So if, say, you had an £800,000 mortgage and £200,000 worth of savings, you would only pay interest on the £600,000 difference. As the amount in your savings account fluctuates over time, so will the portion of the mortgage on which interest is charged.
The pros and cons of an offset mortgage
Because you pay less interest, offset mortgages can be a good way to reduce your monthly outgoings. Ultimately, you may also be able to clear your loan early.
Another plus is that your money is still accessible to you, should you need it at any point. Deals can also be fairly flexible – you can offset both savings and current account against your mortgage.
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. Savers have had a raw deal of late and, while returns are so low, offsetting is one way of making your money work harder.
On the flipside, it is important to remember that any money held in offset accounts won’t earn you interest anymore.
The rates charged on offset mortgages are generally higher than on standard mortgages. Although the gap has narrowed recently, make sure you do your sums to be absolutely certain an offset will be ultimately beneficial. If you don’t have many savings, you won’t save very much on your mortgage, and so you may well be better off choosing a different type of loan with a lower interest rate.
Is an offset mortgage for me?
An offset mortgage is generally a good option for those who have significant stable savings. The larger your savings, the greater the chance that an offset will be the best choice.
If you are a higher or additional rate tax payer, it makes sense from a tax point of view. This is because savings you will make on your mortgage aren’t tax deductible.
Offset mortgages are also sometimes used by families to relieve the burden a mortgage puts on less financially secure relatives. Parents, for example, can store their savings in an offset account to help out children who have taken out a mortgage. The savings will still be in the parents’ name, and accessible to them, but while they’re in the offset account they will reduce the amount of interest the children have to pay.
Offset mortgages with Enness
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.
Read more about the case here.
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.