Have you ever considered the benefits of an offset mortgage?
This type of loan allows you to link your savings directly to your mortgage, allowing you to reduce your interest payments and save money over the long term.
In this article, we’ll explore how an offset mortgage works and some of its potential benefits as well as who it might be suitable for and what should be considered when choosing an offset mortgage product.
Introduction to Offset Mortgages
An offset mortgage offers an innovative way to save money on interest payments and reduce the amount of time it takes to pay off your loan. By linking your savings directly to your mortgage, you can use the funds in your savings account to reduce the balance owed on your mortgage.
This means that rather than paying interest on the full amount borrowed, you’ll only be charged interest on what remains after deducting any money held in savings linked to the mortgage.
How Does an Offset Mortgage Work?
An offset mortgage is designed to reduce the amount of interest you pay on your loan each month. This is done by linking the savings account to your loan account. Any money saved in the savings account will be ‘offset’ against the loan, which effectively reduces the amount of interest you have to pay each month.
To illustrate how this works, let’s look at a simple example. If you had a mortgage of £200,000 and savings of £20,000 linked to it, then only £180,000 would be subject to interest payments meaning you would be paying reduced interest.
There are several ways you can make use of an offset mortgage, such as making lump-sum payments into your savings account when possible or transferring your monthly salary straight into your savings before it goes into your current account. All these options could save you money on interest and help you pay off your loan faster.
Offset example
If you had £20,000 in an offset savings account while also having an outstanding £200,000 mortgage balance, you would only be charged interest on £180,000 rather than the full amount.
£200,000 less £20,000 = £180,000 net mortgage debt
Instead of earning interest on your £20,000 savings, the lender will reduce the amount of interest charged on your mortgage each month. This calculation generally happens each day.
The Benefits of an Offset Mortgage
Cheaper monthly payments
Lower your outgoings by the amount of the offset interest benefit each month
Pay off your mortgage sooner
By keeping your monthly payments the same, more of it goes towards repaying the debt, speeding up the time taken.
Access to savings
While you will have an offset deposit account linked to your mortgage, it is still possible to access the account to withdraw money. This will reduce the offset benefit but means you can have easy access to money at any time.
One of the biggest advantages of an offset mortgage is that it can save you money on your monthly mortgage payments. By reducing the amount of interest you owe each month, you could end up paying off your loan faster and possibly save thousands of pounds in interest over the long term. Additionally, if you have significant savings then you might be able to reduce your mortgage balance completely and become mortgage-free sooner.
An offset mortgage can also be more flexible than a traditional mortgage as it allows you to move money between accounts in order to reduce your interest payments. This means that if you come into some extra cash, such as a bonus or inheritance, then you could make full use of this by transferring it straight into your linked savings account. This could end up saving you thousands in interest payments over the life of your loan.
Who is an Offset Mortgage Suitable For?
An offset mortgage could be suitable for anyone with a fairly significant amount of savings that they are looking to link to their mortgage. It’s also beneficial for those who have variable income, as the ability to move money between accounts can help manage fluctuations in your monthly mortgage payments.
Self-employed borrowers could use money put aside for their tax bill to offset against their mortgage, without having to pay tax on the benefit.
It’s worth noting that an offset mortgage can offer significant tax advantages if you’re a higher-rate taxpayer. Since any money saved in your linked savings account will not be subject to income tax, this could result in huge savings over time.
What Should You Look For When Choosing an Offset Mortgage?
When choosing an offset mortgage product it is important to consider how much you will need to borrow and how many years you want the loan for. Additionally, look for a lender that offers competitive rates and good customer service.
Also, remember to check if there are any early repayment charges or additional fees associated with the products in order to ensure you get the best deal possible.
It is essential for you to be sure that an offset mortgage is the right one for you. They don’t usually offer the very best interest rates, as the main advantage is the ability to offset in a flexible way.
You may be better off with a traditional mortgage.
In summary
An offset mortgage can be a great way of reducing interest payments on a loan and potentially saving thousands of pounds over the life of the loan. However, it is important to consider all the options available and choose the best product for your individual circumstances.
Remember to do your research, compare rates and fees and make sure you read up on the terms and conditions of any mortgage product before committing. If you would like more information or advice regarding offset mortgages please contact us today and speak to an offset expert.
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Sean Horton is a co-owner of Drake Mortgages and has worked in financial services, mortgages and insurance since 1988. Previously a financial adviser and a mortgage broker, he regularly writes about mortgages, bridging loans and commercial finance.
