Offset mortgage; Save money by offsetting your interest payments
Looking around the current lending market, an offset mortgage might seem like just one more in a variety of ways you can repay your loan. But while this is true to an extent, an offset mortgage is not like choosing a fixed, discount or tracker deal – it changes the entire calculation of how you pay. So whether an offset mortgage is the right kind of deal for your circumstances will require some in depth calculations. If it is suitable, ensuring you get the best offset mortgage takes experience, expertise and relationships with lenders. That’s why it’s a good idea to seek out professional advice from brokers like The Mortgage Broker Limited.
What exactly is an offset mortgage?
The offset mortgage made its debut on the lending market in 1997. Its purpose is to allow borrowers to literally ‘offset’ the debt of their mortgage against their savings. And the effect of this is to reduce the interest payable on debt. For example, if you have an offset mortgage of £200,000 and savings of £15,000, you only pay interest on the remaining balance of £185,000, which of course saves you money. But, as an offset mortgage also allows unlimited overpayments at no cost, borrowers can reduce the interest payable further and shorten the term of the offset mortgage in the process.
Is everyone suitable for an offset mortgage?
But, in return for this sophisticated borrowing model, the interest payable on an offset mortgage is often priced higher than on a standard deal. This means that you need enough in savings to make the arrangement worthwhile. The benchmark used to be around 30 per cent of your mortgage balance but, as the offset mortgage becomes more available and therefore cheaper, this figure has now considerably reduced – yet an offset mortgage is still unlikely to be the best deal for a struggling first-time buyer with no deposit.
What happens to my savings?
An offset mortgage will keep your savings in a number of different pots that must be held by the lender in linked accounts. Although you will have access to these savings, they will not earn interest – but the point is that the interest you save with the offset mortgage arrangement will outweigh what you would have earned on these credit balances anyway. What’s more, an offset mortgage means you will be escaping paying tax on the interest earned, which is especially beneficial for high rate taxpayers.
If an offset mortgage is right for me, what else do I need to look for?
Borrowers who find an offset mortgage works for them – perhaps they are some years down the line with their repayments but don’t want to use their savings to clear the remaining debt – should consider the number and type of accounts linked in with the offset mortgage.
For example some lenders allow borrowers to link a current account to the offset mortgage debt as well as savings accounts. This enables them to run their salary through the offset mortgage which means chipping away even harder at the interest.
Other lenders only allow a set number of savings accounts to be linked to the offset mortgage. Again, which deal suits you best can be discussed with a good mortgage broker.
What else might I need to know about the offset mortgage?
