The basic idea of an offset mortgage is that any money you have in credit is offset against the mortgage; in turn this will reduce the amount of debt on which interest is calculated.
This type of product is linked with your savings to reduce the amount of interest charged on your mortgage. Rest assure your savings will not be used to pay off your mortgage but just to sit alongside.
There are generally 2 outcomes from depositing funds in an offset account:
- A reduction in the overall term of the mortgage, or
- A reduction in the mortgage monthly payments
This type of product often provides a high level of flexibility. Due to the potential for a greatly fluctuating mortgage balance, many offset products are free of early repayment charges. This means that little, or no restrictions are in place to overpay or even redeem the mortgage in full.
Who should choose an offset mortgage?
Offset mortgage products are not always the best or lowest rates for everyone. They can be very beneficial, particularly for mortgage holders who regularly hold cash sums in instant access savings accounts. This is because, rather than earning the very low savings interest rates that the current climate dictates, returns are effectively equivalent to the higher rates applying to mortgages.
Before taking out an offset mortgage, you should always ask; ‘will I have a regular savings pot in the offset account?’ If the answer is no, it may be more beneficial to secure a conventional mortgage product, especially where lower rates or fees can be secured.
Many contractors find that offset products are highly advantageous to their situation. This is because many contractors hold contingency funds and savings in deposit accounts, otherwise earning very little interest.
How does an offset mortgage work?
If you have borrowed £200,000, and have a total of £30,000 in savings, you will only be liable to pay interest on the difference. Therefore in this example you would only pay the interest calculated on £170,000.
It is important to note that as your savings increase or decrease, the same will happen with the amount of mortgage your interest is charged on.
Advantages of an offset mortgage:
- You can save a lot of interest which will reduce your monthly payments, or enable you to pay of your debt far quicker
- You still have access to your savings if you ever were to need it
- Large sums of money can be put straight into your mortgage without penalties
Disadvantages of an offset mortgage:
- The money in your offset account will not earn any interest
- If you do not have much in savings, you will save very little interest over the mortgage term