Offset mortgages link together mortgages and savings to lower the outstanding amount you owe on your mortgage, and therefore help to reduce your repayments. If you're earning only a small amount of interest on your savings, holding them in a bank or building society that runs your mortgage account and choosing to offset them, can make your money work harder for you.
Offset mortgages are relatively simple products that are designed to help savers with mortgages. You only pay interest on the outstanding balance of your mortgage so by taking your savings into account, an offset mortgage can deliver a number of financial advantages. However, they’re not for everyone. Here, we’re looking at some of the pros and cons of offset mortgages and the personal financial circumstances that best suit this style of borrowing.
The primary reason for choosing an offset mortgage is that it may save you money. If you have savings of, for example, £20,000 and you’re paying off an outstanding mortgage balance of £120,000, your savings can reduce the amount of mortgage you’re paying interest on to £100,000. Essentially, your savings are used to ‘offset’ your mortgage balance. This leaves you with a choice – continue to make the same mortgage payment each month, thereby reducing the term of your mortgage, or to reduce the amount you pay and be a little better off in the here and now. Offset mortgages are a way of using your savings without losing access to them altogether, as you would if you simply used them to pay off a chunk of your mortgage. It’s also worth noting that although the savings you hold and offset against your mortgage need to be with the same bank or building society as your mortgage, they don’t always have to be held in the same savings account. If you’re a parent looking to help a child buy a home, this means that your savings, offset against your daughter or son’s mortgage could dramatically reduce the rate of interest they pay each month.
If you’re not a saver, then the main drawback of offset mortgages is that they’re simply not available to you. If you’re a saver, then you may find offset mortgages to be a more expensive option. Rates can be up to 0.5% higher compared to similar non-offset mortgage products. As well as having higher rates, you may discover that other potentially attractive mortgage features, like tracker rates and fixed rates are not available when you choose an offset mortgage. Even if you are a saver, it may be that it would be more advantageous for you to boost your deposit using your savings, reducing your mortgage term and/ or monthly payments in this way.
The higher your savings, the more likely an offset mortgage will be a good choice for you. The best way to find your ideal mortgage is to speak to a specialist, who can consider all of your requirements, as well as your personal financial situation and guide you in the right direction.