An offset mortgage lets you use your savings to reduce your mortgage interest. Offsetting is when the lender takes your savings balance away from your mortgage balance, before calculating the interest. This means you pay interest on a smaller balance – reducing the amount you’ll owe.
With offset mortgages your savings remain accessible to you if you need them. You can use them to help you repay your mortgage more quickly, but still have the savings to fall back on in an emergency. Sometimes people find this more appealing than using their savings to make mortgage overpayments or provide a larger deposit.
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With an offset mortgage, you need a savings account with your mortgage lender. Your savings account, or sometimes multiple savings accounts are linked to your mortgage account. Some lenders also allow you to link your current account to the same mortgage.
Savings held in all linked accounts are then used to reduce the interest owed by offsetting the total savings balance against your outstanding mortgage balance.
For example: If you owe £100,000 on your mortgage, but have £20,000 across your offset savings accounts, you only pay interest on £80,000 of your mortgage balance.
Note: You won’t earn any interest on the savings in offset accounts. To ensure offsetting is the best use of your money, your mortgage interest rate should be higher than the rate you could earn in savings interest (after tax).
Offset mortgage interest rates are usually higher than ordinary residential mortgages, but not dramatically so. Most sit around the mid-market level, but the cheapest rates or longest fixes may not always be available with an offset facility.
Offset mortgage rates also vary with your LTV (loan to value) and credit score just the same as any other mortgage. It's a good idea to compare offset mortgages carefully to find the most suitable one available for your circumstances. Look at the total cost including fees, not just interest rates.
You should also consider how easily you can withdraw your money and the customer service provided by your lender.
It can be, but it will depend on your circumstances. Those with a larger savings balance and in a higher tax bracket will typically benefit most.
If you have a large amount of savings, an offset mortgage has the potential to save you a considerable amount of money on interest over the duration of your mortgage. Keep in mind that you will need to leave the savings in the account to continue benefiting at the same level, however.
The savings you make on interest can either be used to lower your monthly repayments, or you can continue to make the original monthly repayments, and reduce the length of your mortgage term.
When savings rates are low, you can make your money work harder by reducing your mortgage interest payments
If you have lots of savings you may have to pay tax on the interest you earn, whereas mortgage offsetting is tax-free
You can reduce your monthly payments, but still access your savings in emergencies
Your money may get better returns in long-term investments or a high-interest savings account
Offset mortgages often have higher interest rates than other products
Your savings may be put to better use by increasing your deposit and getting a better LTV (loan to value) and therefore more competitive mortgage deal
Mortgage interest is often higher than the savings interest paid on a standard savings account. Where this is the case, your money would be better used reducing your mortgage repayments, rather than adding to your savings.
Exactly how much you’re able to save depends on:
The interest rate you're offered
How much savings you have to offset against the mortgage balance
Which tax band you're in, as the higher your tax bill, the more you could potentially write-off through offsetting
You have a £150,000 mortgage at 4% APR over 25 years
You deposit £20,000 of savings with your lender
You only pay interest on £130,000 (even though you still owe £150,000)
Compared to paying the same rate of interest on the full mortgage balance, you save around £800 in interest charges per year.
You also have a savings account paying 2% AER
You’d be around £400 per year better off by offsetting your mortgage than you'd earn in interest by leaving the same balance of £20,000 in your savings account
An offset mortgage can be a good idea if you’re looking to lower your monthly repayments and have the savings to do it. There are a few different types of offset mortgage, so be sure you pick the best option for your circumstances.”Kellie Steed, Mortgage Content Writer
Not all lenders have offset mortgage deals available, in fact, they are fairly hard to come by.
Of the major high street lenders there is a NatWest offset mortgage available, and Barclays also offer one, but the majority are offered by building societies.
Yes, this is the main benefit of using an offset mortgage instead of using your savings to pay down the mortgage debt quicker.
However, depending on who your offset mortgage is with, withdrawing your money may take longer and you may not enjoy instant access as you would with a current account. Some lenders also have a maximum number of withdrawals allowed in a particular period.
Don’t forget that if you withdraw your savings, your interest payments will increase as the offset savings balance reduces. Equally, you can add to your savings, increasing the interest savings even further.
You’ll pay the standard costs that come with any mortgage, such as arrangement fees, legal fees and valuation fees.
The arrangement fee may be higher than other mortgage products, but usually lenders put offset interest rates slightly higher instead.
There are different offset mortgages available, depending on the type of account you want to link:
Savings account offset mortgages - Usually the preferred offset mortgage, this links your savings account(s) to your mortgage account and just the savings balance is offset against the interest you pay
Current account mortgages - where you have a combined account for your mortgage, savings, and current account activity and the overall balance is used to reduce the interest you pay.
Family offset mortgages - family members link their savings accounts to your mortgage and the combined balance of any linked savings offset your mortgage interest. This can be very beneficial for first-time buyers, especially if a couple both has family members willing to link accounts
Yes, there are lenders that offer offset mortgages for buy-to-let properties. However, some providers limit offsetting to residential mortgages, so do your research carefully.
It depends on the mortgage provider, but most let you offset up to 100% of the value of the mortgage.
Don’t forget, the account doesn’t earn any interest, so if you have more in offset savings than the outstanding amount owed on your loan, you are likely to be better off moving the spare cash to an interest-paying vehicle.
This will depend on the terms and conditions of your mortgage, but most lenders let you overpay about 10% of the remaining mortgage balance each year, without charging an early repayment fee. However, if you have an offset mortgage, instead of overpaying you can add to the money in your savings account, reducing your monthly interest charges. At the end of the mortgage deal, you could then use those savings to pay off a chunk of the capital you owe without paying any early repayment fees. This way you reap dual benefits from the same savings balance.
If your savings balance is higher than your mortgage balance, you won't benefit from those savings above the outstanding mortgage balance with an offset mortgage.
As you don't earn any interest on savings that are offset, once your savings cancel out 100% of the interest payable, excess funds are better placed in savings accounts.
You could also consider whether you might want to use the funds to clear your mortgage, bearing in mind any ERCs (early repayment charges) that may apply.
Getting an offset mortgage is most beneficial to those with larger savings and paying a higher rate of tax. Because you don't earn interest in an offset linked savings account, you won't have to pay any income tax on the savings.
Self-employed mortgage borrowers can also potentially use their pre-tax income to reduce mortgage interest using an offset mortgage, as income tax is most often paid in arrears.
Those with lower savings may still benefit from an offset mortgage, but if the annual savings are fairly low, your savings may be put to better use by increasing your deposit to lower your LTV. Lower LTV mortgages typically have access to better interest rates.
This depends on your circumstances and the interest rates available to you. In some circumstances it would be more beneficial to provide a larger deposit to access the best interest rates available.
You could potentially still shorten your term to pay less interest overall than you would otherwise.
A broker will be able to help you compare the best offset mortgages against the best non-offset rates based on the deposit you have available.
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