Offset Mortgages Explained
What Is an Offset Mortgage?
An offset mortgage is linked to your savings account and effectively reduces the amount of interest you are charged on your mortgage. Rather than your savings being used to pay off your mortgage, the amount you save is deducted from your mortgage total and you are then only charged interest on the remaining amount.
For example, if you have a mortgage balance of £200,000 and savings of £30,000, you will only pay interest on £170,000.
What Are the Benefits of an Offset Mortgage?
In a nutshell, an offset mortgage has the following benefits:
- Lower monthly payments: being charged less interest on your mortgage means that you could choose a lower monthly repayment.
- Shorter mortgage term: most lenders will let you choose to keep monthly repayments the same and pay off your mortgage sooner.
- Easy access to savings: you can withdraw from your savings at any time, so an offset mortgage is a good way of saving without completely tying up your money. Just keep in mind that any reduction in your savings will increase the amount of your mortgage you are charged interest on.
- Tax efficiency: interest on a normal savings account is taxed once you earn more than a certain amount. However, with an offset mortgage you won’t pay tax on the money you save. This makes them even more tax efficient for higher–rate and additional–rate taxpayers, because they would pay more tax on their savings interest.
- Higher returns: Mortgage rates are usually much higher than savings rates, so the savings you can make on mortgage interest are greater than the return you could get from a standard savings account.
What Are the Drawbacks of an Offset Mortgage?
It’s important to weigh up the pros of an offset mortgage against the cons before you decide if it’s right for you. The cons can be summarised as follows:
- Higher interest rates: Interest rates on offset mortgages are usually higher than on standard mortgages, so it’s important to do the sums to see if you could save more by having a separate mortgage and savings account.
- You’ll need a large savings balance to make a tangible impact on your mortgage.
- Your savings won’t earn any interest and therefore won’t grow as they would with a normal savings account.
Can I Add To My Savings Account?
With an offset mortgage, you can add to the linked savings account at any time, thereby reducing the interest you pay on your mortgage further. Most lenders will also let you make overpayments on your mortgage, should you wish to do so. Keep in mind though, that overpayments to your mortgage means you can no longer access that money, so if it’s money you may need in the future it would be best to add it to your linked savings.
Are There Different Types of Offset Mortgage?
The main variable is the type of benefit you get from offsetting your savings against your mortgage. Usually, you can pick one of the following benefits:
- Lower monthly repayments to leave you with more in your pocket each month
- A shorter overall mortgage term – your monthly repayment will be higher, but you’ll pay off your mortgage quicker and pay less overall
- Repayments that go down each year, assuming the interest rate stays the same
Some lenders will allow you to combine your current account with your mortgage. Your mortgage sits in this account as a negative balance and any wages or savings that are paid in reduce the balance and therefore decrease the interest. You can still make withdrawals and spend your money as you would with a normal current account, but you benefit from the money reducing your mortgage balance while it is in your combined account.
Some lenders will also allow you to link the savings of friends and family to your mortgage account.