An offset mortgage allows you to offset your savings against your mortgage to reduce the interest you’ll pay on the loan.
Whatever interest you would earn on those savings is offset against what you would pay on your mortgage.
It’s a useful type of mortgage for those fortunate enough to have savings.
What is an offset mortgage?
If you’re lucky enough to have significant savings, you can ‘pay’ your mortgage interest with what you would earn from those savings.
For example, if you have £20,000 in savings and a £200,000 mortgage, you will only pay interest on £180,000.
That doesn’t sound much, but you could save 10% on the overall interest you would pay on the mortgage.
These figures depend entirely on the savings interest the lender offers and the mortgage interest you’re charged of course.
Some offset mortgages will also allow you to offset savings interest against someone else’s mortgage interest.
That could be useful for parents wanting to help children or other situations.
How does an offset mortgage work?
It’s relatively simple in principle. You’ll need to work with a lender that offers savings as well as mortgages and place your money with them.
You’ll set up your mortgage in the usual way and the savings account will be the same as any other. The two products will be linked, so the rate of each will be calculated depending on how much you have in savings.
You can add or remove savings in the same way as any other savings account and the system will calculate the savings.
Some offset mortgages will also include the ability to overpay so you could further reduce the amount or the term of the loan.
Pros and cons of offset mortgages
Offset mortgages have a lot to recommend them if you have savings but they do have downsides.
Pros of offsetting:
Ideal for savers – If you have savings that you won’t need for a while, this is a simple way to lower the mortgage interest you’re paying on your loan.
Good for avoiding savings interest tax – If you have significant savings, an offset mortgage helps you avoid paying tax on savings interest.
The savings account works just like any other – You can add or remove savings at any time depending on the specific conditions of the account.
Cons of offsetting:
You may earn more savings interest elsewhere – Offset mortgages won’t usually pay anywhere close to the top savings rates so you may lose out on interest.
Needs stable savings – It’s mainly useful for those who can lock away a significant sum for a long period of time to get the most out of it.
Can attract higher rates – An offset mortgage can often be more expensive than a tracker mortgage or discount rate mortgage.
Offset mortgages – Yes, or no?
An offset mortgage can be a good idea for those fortunate enough to be able to lock away a significant sum of money for a long time.
The more you can put away, the more useful an offset mortgage becomes.
Savings won’t earn interest and the amount earned isn’t usually up with top savings accounts, but the ability to save on mortgage payments offers real value.
As does the ability to offset your own savings against someone else’s mortgage.
It is a niche product but one that could fit people in certain circumstances. If you have the money to lock away, an offset mortgage is well worth investigating further.
