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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 an offset mortgage your savings remain accessible to you if you need them. This means you can use them to help you repay your mortgage more quickly, without losing the security offered by having the savings to fall back on. Sometimes people find this more appealing than using up their savings to make mortgage overpayments.
Offset mortgages are available on both purchase and remortgage products and as interest-only or repayment, however, they typically work best with a repayment mortgage.
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Like any repayment mortgage, you pay off a chunk of the capital and some of the interest with each repayment and own your home outright at the end of the term - unless you opt for interest only.
With an offset mortgage, you hold a savings account with your mortgage lender that's linked to your mortgage account. Some lenders allow you to link multiple savings accounts and/or your current account to the same mortgage.
Savings held in all linked accounts is 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 in your offset savings accounts, you will only pay interest on £80,000 of your balance.
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).
It can be, but it will depend on your circumstances. You don’t need a huge amount of money to use an offset mortgage, but those with a larger balance will 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.
The interest rates on this type of mortgage are not always the most competitive, however, so it’s worth weighing up how much you would be saving per month by offsetting your savings versus simply choosing a mortgage product with a lower interest rate.
With the vast majority of offset mortgages you can add to or withdraw from your linked savings accounts at any time. Some lenders have a maximum number of withdrawals allowed in a particular period, or you may have to wait slightly longer to access your savings than you would from a current account.
Don’t forget that your interest payments will increase if you take some of your savings out, as the balance in your offset mortgage account reduces. Equally, if you add to your savings, you will increase the savings you’re making on interest even further.
Often the interest charged on mortgages is considerably higher than the rate of interest it’s possible to earn from a savings account. In many cases you will, therefore, be financially better off if you cut down what you’re spending out on your mortgage repayments, rather than trying to maximise your savings income.
Exactly how much you’re able to spend will depend on the following factors:
The interest rate on the mortgage
How much savings you have
The value of the property
You have a £150,000 mortgage at 4% APR over 25 years
£20,000 of savings deposited with your lender
You only pay interest on £130,000 (even though you still owe £150,000)
You save around £800 in interest charges per year
Assuming your savings account is 2% AER, you’d be £400 better off each year by offsetting your mortgage
This will depend on the terms and conditions of your mortgage and what kind of deal you go for. 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.
An offset mortgage is very similar to a standard repayment mortgage, so you can get discount rate, fixed-rate and tracker rate deals, depending on your preference and circumstances.
It’s unusual to find an interest-only offset mortgage, but there are a handful available. Typically this would be reserved for those buying buy-to-let properties to rent out for profit, rather than someone looking to buy their own residential home, however.
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
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
You’ll pay the standard costs that come with any mortgage, such as arrangement and legal fees. You may also have to pay exit fees on your current mortgage if you leave early or close your account.
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.
Yes, there are plenty of 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.
Offset mortgage interest rates are higher than ordinary mortgages, but not dramatically so. Most sit around the mid-market level, but the very cheapest rates or longest fixes may not always be available with an offset facility.
Offset mortgage rates also vary with your LTV and credit score just the same as any other mortgage. Compare offset mortgages carefully to find the cheapest. Make sure you look at the total cost over the deal period, including fees, to compare the overall cost, not just interest rates.
You should also consider how easily you can withdraw your money and the customer service provided by your lender.
If your savings balance is higher than your mortgage, then you would be best to place the remainder into a savings account. You don't earn any interest on savings that are offset, and once you have enough savings to cancel out 100% of the interest on your mortgage, there is no benefit to saving any more in that account.
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.
This will really depend on your circumstances and the interest rates available to you. Whilst you could reduce your interest for the full duration of the mortgage using an offset deal, in some circumstances it would still be more beneficial to provide a larger deposit to access the best interest rates available, and then shorten your term. This way you could still end up paying less interest overall.
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.