What are Offset Mortgages?
Offset mortgages work by linking your savings to your mortgage. Rather than earning interest on your savings, your money is offset against your mortgage. As a result you pay less interest on that debt which, in turn means, you can clear your mortgage quicker.
For example, if you had a £150,000 mortgage and £30,000 in savings, you would only be charged interest on £120,000. Your monthly capital repayments will probably be based on the full £150,000 meaning you effectively overpay each month and therefore pay your mortgage off more quickly.
The idea is that the interest you save on your mortgage payments by paying interest on the lower amount (£120,000 in this case) but not receiving interest on your savings is more beneficial than paying interest on the higher amount (£150,000) and receiving interest on your savings. With an offset mortgage, you retain access to your savings so it is a much more flexible option than using your savings to pay off a chunk of your mortgage as you can get access to your money whenever you want. In many cases you can also link the mortgage to your current account and even an ISA as opposed to your savings account.
Those who make the greatest gain from offsetting are those with a large amount in cash savings (paying a reduced interest rate the higher your savings) and higher / additional rate taxpayers because the more you have in savings the more interest you usually pay but with offsetting, you won’t pay income tax on interest received in your savings account because no interest is received (it is offset).
Offsetting can be very beneficial but it is not a no-brainer and if you only have a small or moderate level of savings, you may decide to go for a standard mortgage. Interest rates are typically a fair amount higher than on an equivalent standard mortgage for example due to the increased flexibility. It is estimated that to make an offset mortgage advantageous, a savings account containing around 25% of the property’s value to offset against is required to make the arrangement worthwhile.
With fixed-rates at an unprecedented low, standard mortgages are proving very popular in the mortgage market. However, offsets may still be worth investigating, even if they don’t provide a substantial benefit to everyone.