Offset Mortgages Put Simply
The idea behind an offset mortgage is simple and straightforward. By linking your mortgage and your savings, you can bring down the cost of your loan. This is because rather than earning interest, your savings reduce the amount of interest you pay on your mortgage. In other words, the more you save, the less interest you’ll pay on your mortgage.
The key benefits of an Offset Mortgage
- Choose to reduce your monthly payments
- Choose to pay off your mortgage sooner
- Link multiple offset savings accounts (subject to lender)
- Make overpayments whenever you like without incurring an Early Repayment Charge (subject to selecting a no ERC product at outset)
- Make underpayments (with your lenders agreement)
- Benefit from great equivalent savings rates on your savings
How your mortgage and savings are combined
Your offset mortgage account and your offset savings account remain separate, it’s just that they’re linked. This means that as well as having access to your savings, you benefit by only paying interest on the difference between the amount in your savings and your mortgage amount.
How offset mortgage benefits work
Choose ONE of the three benefit options below before your mortgage starts. You can easily change your mind at any time in the future.
|Option 1: |
Reduce Current Payments
|Benefit from lower payments now,|
but keep the mortgage term the same
Reduce Payments In The Future
|Benefit from lower payments at each |
annual review, but keep the same
|Benefit from paying off the mortgage|
quicker, but keep your monthly
payments the same
Understanding the equivalent savings rate
The money in your offset savings account benefits from the equivalent rate that you are being charged on your offset mortgage. You don’t earn any interest on your savings, but you only have to pay interest on the difference between your offset mortgage balance and your offset savings balance.
Your adviser will be able to confirm the equivalent savings rates for each offset product. These are based on the current interest rate for each mortgage product. Where the rate of your offset mortgage is variable or reverts to a variable rate after an initial fixed rate period, the equivalent savings rate will change when the relevant mortgage rate changes.
With traditional mortgage and savings products you usually pay a higher rate of interest on your borrowings than you receive on your savings. If you’re a taxpayer, you may also pay tax on the interest that you earn on your savings.
Offset Mortgage Myth Buster
Those that have heard of this type of mortgage deal may have been put off by warnings that it’s more expensive or too restrictive. However, the truth is that:
- You can get at your money quickly – it’s not locked away.
- A small amount of savings can make a big difference – a modest pot of £2,500 could shorten a £100,000 mortgage by seven months over a 25-year term!
- The mortgage interest rates on these deals are not that much higher. Like any financial product, there are more and less competitive rates, so use an expert broker like Mint FS to shop around.
Another Myth is that the choice of lender will be limited and therefore these products are not readily available. Contrary to this, more and more lenders are offering offset mortgage products – a selection of these are listed below:
- Accord Mortgages
- Beverley Building Society
- Family Building Society
- Hinckley & Rugby
- Melton Mowbray Building Society
- Norwich & Peterborough
- Scottish Widows
The benefits of overpaying or saving more
Once your savings are offset against your mortgage, you can still add to them. Unless savings rates elsewhere are too tempting, you might want to consider this, as more money offset means more interest saved.
Some offset mortgages also allow you to overpay. This will have the same effect of saving you interest, but as you’re physically repaying part of your mortgage, you’ll likely won’t be able to get the money back later. Offset savings, on the other hand, remain alongside the mortgage. They don’t repay it, so you still have access to your money.
Offset Mortgages can help children get on the property ladder
Offset mortgages can offer a great alternative to becoming a guarantor or physically giving your child money towards buying a new home. While there are only a few mortgages, if any, that will allow the parent or guardian to add their savings directly and retain some direct control, it’s entirely possible for you to gift the funds to your child, with the promise of getting them back later – as long as your child doesn’t default on their mortgage payments.
Pros and cons of offset mortgages
Want to know more? Call the experts at Mint FS today on 0330 1355914 for an initial consultation – or complete our contact form and we will call you back.