Should You Get An Offset Mortgage?

| 3 min read

There are numerous types of mortgages available in the market, and it can be mindboggling to decide which type of mortgage is right for you.

This article will provide information relating to offset mortgages and weigh the advantages and disadvantages of offset mortgages so that you can decide whether it is for you.

What is an offset mortgage?

An offset mortgage is a viable option for people who have been saving up. If you have some savings in an account, you can use the saving to help you reduce the amount of interest you will be paying against the mortgage.

An offset mortgage is different from the standard mortgages in which you are charged interest on the total amount you have borrowed.

The balance on the savings is not used to repay the mortgage. The amount stays in your while allowing you to make small withdrawals if the need arises.

How do offset mortgages work?

In an offset mortgage, you will only have to pay interest on the amount you have been lent minus the balance of your savings.

Suppose that you have taken out a mortgage for £200,000 at 3% interest and you have £30,000 saving in an account. You will only have to pay interest on £170,000. By offsetting your savings against the full mortgage amount, you can annually save a good thousand pounds.

However, you must remember that if you withdraw any amount from the savings, then the amount you will be repaying will increase proportionately.

Additional benefits of offset mortgages

With an offset mortgage, you will have the option to pay back the borrowed amount over a short term, or you make lower monthly repayments. This is since mortgage repayments are calculated on the total borrowed amount.

You will be making small payments to pay off the total borrowed amount. This will rapidly reduce the amount you owe to the lender as well as the length of time it takes to pay off the entire loan. Depending on your savings, your mortgage term could be cut down by months or even years.

In the alternative, you can request your lender who may allow you to follow the standard mortgage terms.

What are the types of offset mortgages?

Offset mortgages are offered fixed and variable rates of interest. To know more about fixed and variable rates of interest, please see our article on which type of mortgage should you get.

Are the interest rates higher with offset mortgages?

Generally, interest rates are slightly higher for an offset mortgage as compared to the conventional mortgages.

You should also know that some lenders may charge a higher interest rate if you choose to make smaller monthly repayments or if you want to pay back the mortgage earlier than agreed.

Can an offset mortgage help your children buy a new home?

Family Offset Mortgages allow for parental savings to be used against your children’s or a family member’s mortgage. They work in the same way as other offset mortgages, while allowing you to have full control over the amount invested into the new home. This way you will not have to recourse to a sizeable gifted sum of money.

However, you will lose interest on your savings until the mortgage is paid off and you will also not be able to get your money back until more than half of the property value has been repaid to the lender.

Are offset mortgages right for you?

Offset mortgages are a good option for higher rate or additional rate taxpayers, as well as for diligent savers.

The most significant advantage is that you will not have to pay tax on your savings interest. Therefore, if you use your savings to offset a mortgage, you can avoid paying income tax on the interest earned.

However, your savings should cover at least 20% to 25% of the total amount lent to you.

What are the advantages of an offset mortgage?

  • The interest you will be saving will be greater than the amount you could have earned half you left the amount to earn saving in a saving account.
  • You will be able to access your saving if the need arises.
  • You can also link it to you ISA accounts.
  • You can choose to pay the loan off quicker as compared to conventional mortgages or you can choose to make lower monthly repayments.
  • Family Offset Mortgages can help your children climb up the property ladder.
  • You can reach the threshold in savings interest and will still not have to pay tax.

What are the disadvantages of an offset mortgage?

  • You will not earn interest on your savings amount.
  • While you can withdraw an amount from your saving, your repayments will increase proportionally.
  • Mortgage rates may be higher.
  • In most cases, your mortgage and the linked savings account will have to be with the same provider.
  • Offset deals can require a deposit of up to 25% of the value of the property.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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