At a glance
- Offset mortgages can seem confusing but those who take them out can potentially benefit from great savings.
- Having an offset mortgage can provide flexible benefits when it comes to interest.
- Taking advice about whether an offset mortgage is right for you can give you the confidence to know whether you’re making the right decision.
Mortgages are among the most common financial products available in the UK, with most of us familiar with fixed-rate and variable-rate mortgages. But not many people will know what an ‘offset mortgage’ is and how this valuable option could result in potentially dramatic savings.
What is an offset mortgage?
An offset mortgage is a loan to buy a main or investment property, where savings in a linked bank account are deducted from the mortgage amount on which you pay interest. For example, if you have a £250,000 mortgage, and also a savings account with the same bank that contains £25,000, you will only pay interest on £225,000 of your mortgage instead of the full £250,000. As with many other mortgages, offsets are offered at both fixed and variable rates of interest, and either repayment or interest-only versions.
“Few people may have heard of it, but the offset mortgage is something of a hidden gem” says Paul Johnson, Head of Mortgages at St. James’s Place. “Yet because it’s not well known, very few people would be confident enough to choose it without expert guidance – and missing out on this could be costly.”
What benefits can I expect with an offset mortgage?
Having an offset mortgage can provide many flexible benefits:
• Offset mortgages can be a tax-efficient way to use your savings. You won’t pay any tax on savings income, or use up your Personal Savings Allowance, because you won’t be earning interest on your cash – although the savings still generate a return for you by bringing down your mortgage interest payments.
• By offsetting a lump sum savings against your mortgage and making regular deposits into the account, could save a significant sum in interest throughout the course of the mortgage.
• If you continue monthly repayments for the full mortgage loan, the balance will reduce faster and you will pay off your mortgage earlier. Or you could instead choose to make smaller monthly payments on your mortgage for the originally agreed term: these would vary depending on the scale of your savings and how much they reduce the interest owed.
• You have access to your savings as usual, so you can withdraw money (in which case your mortgage interest payments will rise) or you can add to your savings (further reducing the interest on your mortgage loan).
• Many lenders offering this kind of product will allow you to link your own savings with your children’s mortgage. Placing your savings into the savings account linked to your child’s mortgage means that they will pay less in interest – making this a very efficient way for the Bank of Mum and Dad to help get their children onto the property ladder.
Is an offset mortgage a good idea?
Offset mortgages are not perfect for everyone. This will depend on your situation and how you’d like to pay off your mortgage.
|Advantages of offset mortgages
|Disadvantages of offset mortgages
|You’ll pay zero tax on the interest you save.You could save more on your interest than you would earn in a savings account.You can still make deposits and take out money from your savings account.Reduced interest charges means you could clear your mortgage quicker, or pay less each month.
|Interest rates can be higher than comparable standard repayment mortgages.You normally won’t earn interest on any cash held in accounts linked to the mortgage.You may want to use your savings to pay for a bigger deposit instead.There’s a relatively small range of offset mortgages to choose from.
Is it better to put down a bigger deposit or offset?
Putting down a bigger deposit may mean you get offered better rates by banks. If you keep some savings back and put them in an account linked to an offset mortgage means that you’d be paying interest on a smaller sum. However, it would also mean that you would have access to the cash if you needed it.
Is it worth making overpayments?
Many lenders will let you overpay a certain amount each year on your offset mortgage (though early repayment charges may apply), reducing the amount of principal owed, and therefore reducing interest payments too. Once you’ve made an overpayment into your offset mortgage account, however, you won’t be able to access it again – so if you might need the money in future, putting it in an offset savings account may be better.
Is an offset mortgage right for you?
“Offset mortgages does have key advantages for some groups – for example, the self-employed and others with substantial savings but variable monthly income and outgoings” says Paul Johnson, Head of Mortgages at St. James’s Place.
But it’s not for everyone. That’s why it’s crucial that you carefully consider if an offset mortgage is right for you, especially if you have only modest savings. “It’s important to have a goal for your mortgage,” says Paul. “Most people want to pay it off as quickly as possible, and an adviser will assess how you can best achieve this.”
Seek expert advice from an adviser who can discuss how offset mortgages work and decide the best option for you.
The home on which the mortgage is secured may be repossessed if repayments are not kept up to date on the mortgage.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
SJP Approved 10/03/2023