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Offset mortgages
Offset mortgages are a bit of a mystery; not many people know what they are, but they could help you repay your mortgage faster.
Whilst they might seem like more trouble than they're worth, there's nothing really that complicated about offset mortgage.
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Depending on what the interest rates are doing it could save you a few hundred every year and thousands over the lifetime of the mortgage.
What are offset mortgages?
With an offset mortgage, your mortgage and savings account are combined into one single account. This means that the money you have in your savings account can be counted as a temporary overpayment towards your mortgage.
However, unlike overpayments, with an offset mortgage your savings are still accessible and you can get at them if you need to. As with a standard mortgage, you can get discounted, fixed and tracker rate offset mortgages.
How much could I save with an offset mortgage?
If you were to offset the average savings pot of £2,831 against a £150,000 mortgage and you also made a £200 deposit into the account every month you would build up savings of £5,213 over a year - and this would save you £221.17 in interest charges.
Over time, you could save almost £40,000 in mortgage interest, as well as cutting seven years off your mortgage term - all completely tax free.
Wouldn't I be better with a savings account than an offset mortgage?
For many people, offsetting your savings against your mortgage could offer a much better deal than keeping the cash in a normal savings account.
With a typical variable rate savings account paying just 0.83% AER, a saver with the average balance of £2,813 would earn just £23 a year in interest, compared with the £221.17 they could save in interest payments alone with an offset mortgage.
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Don't you need a lot of savings for offsetting to be worthwhile?
You don't need to have a high savings balance to benefit from offsetting. As long as you have a mortgage rate that is higher than your savings rate after tax, you will be better off by offsetting for a little as one year.
In addition, you have the added security of being able to access the savings at any time unlike making overpayments.