Our Comprehensive Guide To Offset Mortgages

Len Burgess[1]

Len Burgess

Money Savings Advice guide to offset mortgages

By taking advantage of an offset mortgage deal, you can use your cash to offset your mortgage interest. An offset mortgage can be a convenient way of using your savings to help reduce your debts.

What Is an Offset Mortgage?

With an offset mortgage, your savings are offset against your mortgage, without accruing the normal interest that they would. You still have access to your savings, but your mortgage rate will increase if you do withdraw from them.

When you have an offset mortgage, you’re making a decision to give up your savings interest in exchange for a better mortgage deal. Your savings are used to offset your mortgage, so you’ll be able to clear your debt quicker.

You’ll typically need a mortgage and savings account with the same provider, though in rarer cases a current account might be used instead.

Read on to learn more about offset mortgages and how they could help you save money.

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What Is An Offset Mortgage?

When you hold savings, you’ll usually earn interest on the money that’s in your account. With an offset mortgage, you agree to stop earning interest on your savings. In exchange, the balance of your savings account is taken off the balance of your mortgage.

For example, if you had a £150,000 mortgage and £12,000 in savings, your mortgage balance would effectively sit at £138,000. As you’re only charged interest on your mortgage balance, you’ll pay less interest and can reduce your debt faster.

An offset mortgage works in a similar way to a flexible mortgage. Your savings act as an overpayment, as though you’ve used more of your money to clear your mortgage debt. The difference, however, is that your savings are still yours to keep. You can use the savings in your account if you need them for anything else, and the effective mortgage value will simply rise if you withdraw the money from your savings.

Offset Mortgages And Family Contributions

Many parents want to support their son or daughter financially, helping them to get onto the property ladder. However, they need their own savings and don’t feel comfortable giving all their cash. Many offset mortgages can be used to allow for parental contribution.

Rather than linking your own savings account to your mortgage, you can choose to link someone else’s with their permission. Your parents might agree that they need their money, but that they’re happy to give up their savings interest to help you to reduce your mortgage payments.

By linking their savings account to your mortgage, they can support you without losing any of their hard-earned savings for retirement.

Linking Multiple Accounts

Though not all providers will offer this, some will let you link multiple accounts to maximise the savings on your mortgage. You may be able to link more than one savings account, or your savings account and your current account, to help you get more from your money.

Who Are Offset Mortgages Good For?

Anyone can benefit from an offset mortgage if they have savings to make it worthwhile. You’ll need to be happy to have a mortgage and savings with the same financial provider.

Of course, you’ll need savings to make any offset mortgage worthwhile. Interest rates for this type of mortgage are usually not market-leading, and unless you have significant savings, you won’t have much impact on your mortgage.

Offset mortgages are best suited to people with a good savings balance or those that earn enough to build their savings relatively quickly. It’s not worth taking the higher interest rates if you can’t build the savings to balance them. Fortunately, you don’t need to be a millionaire to make a difference – even savings of £5,000 could cut your help to pay off your mortgage a year early.

Offset Mortgage Tax Benefits

Whilst your savings are being used to offset your mortgage, you won’t be taxed on what sits in your account. This means that an offset mortgage has direct tax benefits, giving you another way to make more of your hard-earned money. This can make offset mortgages particularly appealing to higher rate taxpayers in the UK.

Offset Mortgage Impact On Savings

It’s important to weigh up the drawbacks of using your savings on your mortgage. As you’re no longer earning interest, your savings will sit stagnant and won’t grow like they usually would. Over time, this means that your savings lose their spending power – the price of everything will rise, but your savings won’t rise alongside.

If you’re choosing an offset mortgage, you must be happy for your savings to effectively decrease in value. Though you won’t be losing your money, it won’t be worth as much by the time your mortgage is paid off.

Most people don’t rely on their savings interest as their income, but you need to be sure that you’re happy to surrender any interest that your savings might have earned.

Offset Mortgage Examples

Here’s an example of how an offset mortgage could be beneficial to you.

This is based on a mortgage of £130,000 over 25 years with £20,000 in savings

Plan Mortgage Interest Rate Service Interest Rate Monthly Repayment Full Term Savings balance at End of Term Mortgage Interest Paid
Standard mortgage + savings interest 2.9% 1% £610 25 years £25,649 £52,943
Offset mortgage 4% N/A £691 23 years £20,000 £48,100

Numbers compiled by Money Savings Advice

This example shows that an offset mortgage would actually have you losing out – you’d make more in savings interest with a standard mortgage and savings account than you’d save in interest with an offset mortgage. That’s why it’s important to always check using a calculator when you find the best rates.

Flexible Savings For An Offset Mortgage

With an offset mortgage, your savings balance is still flexible. You can add money, and remove it, as frequently as you’d like. If you take money out of your savings account, your mortgage balance will increase or you’ll need to make higher monthly payments.

There are no other penalties for withdrawing funds and spending them on other things elsewhere.

Two Ways To Offset Your Mortgage

There are typically two different ways that lenders will allow you to offset your mortgage and save money. First, you can choose to have savings value taken off your total mortgage balance. This is the most popular way to take advantage of an offset mortgage by making your mortgage smaller and reducing the calculated interest. With this option, you can clear your mortgage debt ahead of the original schedule.

A second way to offset your mortgage is just to use the interest each month. Any interest that you earned on your savings gets transferred to your monthly mortgage payment. Your total mortgage value will stay the same, but you’ll use your savings interest to reduce how much you pay every month.

Are Offset Mortgages Worthwhile?

Offset mortgages can be amongst the best choices for many consumers. Though the overall interest rates are slightly higher, these typically aren’t the most expensive mortgages available. As long as you can build up some savings, you’ll have the potential to pay back your debt much earlier than you first agreed.

Offset mortgages can be the best way for parents to support their children. They don’t require any up-front financial sacrifice, so parents can continue to save for their future whilst helping their loved one to buy property.

Getting An Offset Mortgage

If you don’t already have a savings account with your mortgage provider, you’ll be required to set one up to be eligible for an offset mortgage.

As with all mortgages, take time to shop around before choosing which deal suits you best. Don’t settle on a mortgage provider simply because you already use them for your savings, as it’s far better to move your savings around than lose money on a more expensive mortgage.

How Can Money Savings Advice Help You With A Mortgage?

Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best mortgage deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

 

Money Savings Advice Author Len Burgess

Len Burgess

Len Burgess is a professional financial writer who over the last five years has written hundreds of articles for all financial sectors. Len founded Money Savings Advice with the aim of helping consumers navigate their way around the financial world by providing easy to understand financial information and matching consumers with the best financial advisor based on their personal information.

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