What are they?
An offset mortgage is a mortgage where you have a savings account that is linked to your mortgage, so in the same bank or building society.
How do they work?
As they are linked with your savings, the amount of interest you pay on your mortgage is calculated by the amount of savings you have, so you only pay interest on the outstanding loan amount, which actually saves you money and reduces the term of your mortgage.
You won’t earn interest on your savings account, however your savings are used to ‘offset’ the amount that you owe on your mortgage so you only pay interest on what’s left over.
So if you have £20,000 in savings and a £200,000 mortgage, you would pay interest on £180,000, so in essence you have a smaller mortgage before you even start to make any extra payments.
They can be a more expensive option, the interest rates can be higher than other mortgages, so it’s worth doing your homework to see what’s on the market.
There can be less options available with an offset mortgage in terms of choice for fixed rates or tracker rates and other interest and payment options. All providers have something different, so again, do your homework first.
Are they for me?
If you are someone who would like to make overpayments on their mortgage to get rid of it quicker, however are worried about needing their savings for an emergency in the future, this could be a good option because the money is readily available in the savings and can be taken out at any time. This would save you from having to ‘borrow’ back overpayments from a mortgage if you didn’t have this type of mortgage.
If you have a mortgage with a very low interest rate an offset mortgage may not be worth pursuing as you will be earning more interest on your savings than you would be by offsetting them with your mortgage.
If you have some money which you know you won’t need, it’s worth taking out a smaller mortgage as providers tier their interest rates according to the amount you want to borrow. So you could end up losing interest on your savings if you tried to offset them.
If you have a lot of savings, and a low interest rate on your mortgage, you may be better off putting the savings into a high earning ISA, especially if you are in the high earnings bracket. Offsetting would only lower the amount of return on possible interest you could get on savings. Speak to our partner firm Evolution Financial Planning for Investment and Savings advice (You should not rely on past performance as a guarantee for future investment performance).
If you are going to go down this route, check the difference in the interest rate that you would be paying for an offset mortgage, because the bigger the difference the bigger the amount of savings you need to make it worthwhile.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT MEET REPAYMENTS ON YOUR MORTGAGE