What is an offset mortgage?
An offset mortgage enables you to use your savings to reduce your mortgage costs.
With an offset mortgage, you can combine a savings account with your mortgage. This means that the money you have in your savings account can be offset against your mortgage. This will make your money work harder by reducing the mortgage balance you pay interest on.
However, unlike mortgage 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 does an offset mortgage work?
It works just like a normal mortgage but you have the option of depositing your savings with your lender. Instead of paying you interest on your deposited cash, this money is offset against your mortgage so you pay less interest.
For example, if you had a £150,000 mortgage and £20,000 of savings, you could deposit your savings with your lender and you’ll only be paying interest on £130,000 (but you’ll still owe £150,000).
If your mortgage APR was 4%, you’d be saving around £800 of interest charges a year from your mortgage.
If you could only get a 2% AER rate paid on £20,000 (£400 per annum) in a savings account, then you’d be roughly £400 better off by offsetting your mortgage.
What are the advantages of offset mortgages?
The main advantage of an offset mortgage is if savings rates are low you can effectively save at your mortgage rate.
Often the difference between the interest you are charged for your mortgage and the interest you can be paid for your savings is considerable. So you will be financially better off by cutting down on your mortgage costs rather than trying to maximise your savings income.
Also, bear in mind you pay tax at the marginal rate on the interest your savings earn, by using your savings to offset your mortgage, you won’t have to pay tax on the money you are ‘earning’ – principally because you are not actually earning money.
Of course, you could simply use your savings to pay off your mortgage quicker, but you could then never get this money back unless you sell your home. So, an offset mortgage affords you a good degree of flexibility.
What is the downside of an offset mortgage?
Again it’s all about the rate differences between savings and mortgages, if you think you can put your savings to better work in a more lucrative investment you could be relatively worse off with an offset mortgage. But remember, with investments normally the more lucrative they are the riskier they are, offset mortgages are a relatively safe bet.
Also make sure to think carefully about how much money you can commit to offsetting your mortgage.
When choosing between either a standard or offset mortgage (or any type of mortgage), always make sure to compare mortgages on the total cost APR as well as the initial rate. And don’t forget to factor in arrangement fees, and if remortgaging, any exit fees of your current mortgage.
Is a savings account better than an offset mortgage?
This depends on what you want to do with your money. If you have something specific you intend to buy or invest in with your savings, then having an offset mortgage could seem like a lot of hassle for a short period.
But offsetting your savings against your mortgage could offer a much better deal than keeping the cash in a normal savings account.
Also if you don’t have much left to repay on your mortgage you may be better off to just pay down it off.
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 time period as little as one year.
Can I withdraw my money from an offset mortgage at any time?
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.
Are offset mortgage rates higher than an ordinary mortgage?
Yes, but typically not dramatically so, most sit around the mid-market level, it’s more the very cheapest rates or longest fixes may not always be available with an offset facility.
Offset mortgage rates vary with your LTV and credit score just the same as any other mortgage.
How to compare offset mortgages
Like any mortgage, you still want to compare offset mortgages on which has the lowest rate. This is because while a higher rate will ‘save’ you more through the savings you have offset against the mortgage, you will still be paying the higher rate on the remainder of the mortgage balance you have not offset.
What are the best offset mortgages
Largely, what makes an offset mortgage ‘the best’ depends on your personal circumstances and so you should ask ‘what is the best offset mortgage for me?’ as there is no concrete way to say which offset mortgage is the best.
So you will want to consider how easily you can withdraw your money and any fees that may apply, as well as less concrete things such as customer service from your lender.