How an offset mortgage makes your savings work harder.
Offset mortgages may save you money and help repay your mortgage early. However they are still thought of as somewhat niche when it comes to mortgage product options. This quick guide summarises the key benefits of an offset mortgage as well as some of the potential drawbacks.
Today we will cover:
What is an offset mortgage?
An offset mortgage is essentially a bog standard fixed or variable rate mortgage product with one key added benefit. Alongside the mortgage account is a linked offset account into which you can put money from your savings or salary.
Any money placed into the offset account will not accrue any interest. However, the amount in the offset account is “offset” against your remaining mortgage balance. Therefore, mortgage interest is only payable on the difference. So if you had a mortgage balance of £100,000 and £20,000 in the linked offset account, mortgage interest would only be payable on the £80,000 difference. Effectively this means that £20,000 of your total mortgage balance is interest free.
You could offset the entire mortgage balance if you had enough savings to do so. This means that the entire mortgage would now be interest free. Remember that the money in the linked savings account will no longer be accruing interest though.
Which lenders offer an offset mortgage?
There are a handful of lenders who offer offset mortgages. They include some of the larger lenders as well as small building societies. Santander, Barclays, HSBC, Coventry, Accord, Yorkshire BS etc are just some of the popular options. The majority of offset mortgages come in the form of a variable rate such as a Bank of England base rate tracker, or lenders variable/discount rate. However, a few fixed rate mortgages also include offset account features but these are a little less common.
What are the benefits of using an offset mortgage account?
Offsetting your savings against the mortgage balance acts in a similar way to making overpayments. It reduces the amount of interest you will pay over the lifetime of the mortgage and allows you to repay the mortgage earlier or reduce your monthly repayments.
You may choose to keep your regular mortgage repayment the same each month. If so you will be working towards repaying the mortgage balance early. This is because less of the mortgage repayment is being used to cover the interest element on the debt and more is being used to reduce the balance itself.
Alternatively, you could choose to keep the remaining mortgage term as it is. In this instance you will reduce your monthly mortgage repayment due to there being less interest payable.
However, unlike overpayments, you retain full access to the funds in the offset account and you can withdraw or add to them at any time. This makes offset mortgages more flexible. They are great if you like to switch money around in order to find the best return. However, just remember that the offset effect only works when there is a balance in the linked offset account. Unlike overpayments, there are no limits with how much you can save into an offset account.
In addition to a savings account, some lenders provide offset mortgages which can also link into a current account balance. This is useful as current accounts often pay very little interest. So offsetting them against a mortgage interest rate will have a much greater effect.
Interest is not paid on savings place in the linked offset account. Therefore, you may benefit from a zero or reduced tax liability compared to a regular savings account.
Drawbacks of an offset mortgage.
The positive effects of having an offset account are only applied while there are funds in the linked account. As soon as the funds are withdrawn, the benefits cease. So to see tangible results in the long run you should be prepared to leave your savings in the account for a decent amount of time.
As having an offset mortgage account is a benefit to the borrower, mortgage lenders will usually uplift the chargeable mortgage interest rate on the product as a result. This means that initial monthly repayments may be a little higher than you might find on a standard fixed or variable rate mortgage deal. Therefore, an offset mortgage is only going to be worthwhile if you intend to use the features it provides.
Your offset linked savings will not accrue any interest. Therefore, you may be able to invest them elsewhere using a regular savings account and earn more interest than you would save using an offset feature. This is especially true when mortgage interest rates are low and savings rate are relatively high.
Offset mortgage calculators.
Use an online offset calculator to work out the savings you could expect to see. Lenders who provide offset mortgages also include calculators to help you work out whether or not an offset mortgage is right for you.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
