There are different kinds of mortgages.
Some suit different owners at different times.
One of these is an offset mortgage.
This article explains what this is, its pros and cons, and who it might benefit from.
What is an offset mortgage?
An offset mortgage (also known as an interest-only mortgage) allows you to offset your savings against your mortgage debt.
It’s a type of mortgage that reduces your interest by linking your savings and current account balances to your mortgage.
You don’t earn interest on your savings. Instead, the money offsets your mortgage debt.
This reduces the amount of mortgage debt you pay interest on.
Offset mortgage example
If you have a £200,000 mortgage and £50,000 in savings accounts linked to your mortgage, you would only pay interest on £150,000.
This saves you money compared to keeping your mortgage and savings balances separate.
The benefits come from the fact that you aren’t earning interest on savings but reducing mortgage interest.
For many borrowers, mortgage rates are higher than savings rates. So, this arrangement saves them money.
Do all banks offer an offset mortgage?
Not all lenders offer offset mortgages.
Larger banks and building societies tend to offer them such as:
- Nationwide
- Halifax
- HSBC.
Smaller building societies and specialist lenders are less likely to offer them.
Before taking out an offset mortgage, you’ll want to find the best deal.
Consider the interest rate, arrangement fees, and whether you can make overpayments.
Make sure your savings accounts allow offsets – some have restrictions.
You don’t have to leave your mortgage and savings accounts with the same provider.
But, doing so can make managing an offset mortgage easier.
What type of people is an offset mortgage beneficial for?
People with considerable savings
The more savings you have, the more you’ll benefit from offsetting. You’ll likely need at least £10,000 in savings to make it worthwhile.
Borrowers who struggle to overpay
Offset mortgages allow you to reduce your mortgage debt without making overpayments.
This can help if you have an interest-only mortgage or struggle to make lump-sum payments.
Homeowners who want flexibility
With an offset mortgage, you can access your savings anytime, giving you flexibility if you need the cash.
People looking to reduce interest
The main benefit is saving on interest payments.
So, offsets work well for borrowers with high mortgage debt and/or high savings balances.
Advantages of an offset mortgage
Interest savings
This is the main reason for choosing an offset mortgage.
By offsetting your savings, you’ll pay less mortgage interest.
Overpayment flexibility
Offset savings can be used instead of lump sum repayments to reduce your mortgage term.
And you still have access to the savings if needed.
Keep savings liquid
Money in your offset account remains accessible as cash savings.
You don’t have to lock it away or sacrifice liquidity.
Simple to understand
Offset mortgages are straightforward.
It’s easy to work out mortgage interest due for essential savings offsets.
Often free
Many offset accounts have no monthly or overdraft charges, although some lenders charge annual fees.
Improve credit score
Offsetting means you’re reducing your mortgage debt.
This can help improve your credit report and ability to borrow more in the future.
Disadvantages of an offset mortgage
Savings earn no interest
The tradeoff is that your savings offsetting your mortgage earn nothing.
Interest rates are low, but you still need to forgo interest income.
Setup and ongoing fees
Some offset mortgages have arrangements or annual account fees when you take one out.
Check that these don’t outweigh savings.
Limited overpayment options
Most offset mortgages limit overpayments to 10% of the outstanding loan yearly.
You need savings
You’ll need significant savings earning little interest to benefit from an offset mortgage. If you have minimal savings, it may not save you much.
More complicated to compare deals
Offset mortgage rates aren’t comparable to standard mortgages. The interest savings affect the actual cost.
Things to consider before jumping into an offset mortgage
Do you have enough savings?
Check that you have enough savings for offsetting to be worthwhile. Don’t forget to keep an emergency fund.
How do interest rates compare?
Calculate potential savings based on your mortgage and savings balances and current rates.
Are there cheaper options?
An offset mortgage may not always be the cheapest way to reduce interest. Consider other options, such as:
- Overpaying your mortgage
- Equity release
- Remortgaging.
Are you paying fees for offset features?
Some offset mortgages have annual fees. Make sure these don’t outweigh the savings.
Could a flexible mortgage work?
If you want access to your savings, consider mortgages that allow overpayments and withdrawals.
Are your savings accounts compatible?
Check that offsetting is allowed on your savings accounts before linking them to your mortgage.
How long will you need the mortgage?
Offset mortgages work best for long-term loans.
