Offset mortgages are designed to help customers save money while repaying their mortgage. Linking an offset mortgage with your savings can lower the amount you repay every month or reduce the repayment term.
To find out how offset mortgages work, read on as we go into more detail.
- How does an offset mortgage work?
- When are offset mortgages a good idea?
- The advantages
- The drawbacks
How does an offset mortgage work?
Offset mortgages provide help for savers with their mortgages, by holding both an offset mortgage and savings account with the same provider. With an offset mortgage, you would pay interest on your outstanding mortgage balance minus savings, rather than the balance itself.
If you have an outstanding mortgage balance of £120,000 and savings of £20,000, with an offset mortgage you will only pay interest on £100,000. Essentially, your savings are used to ‘offset’ your mortgage balance.
Many offset mortgage holders see it as a useful way to make their savings work hard to make life simpler – and their mortgage payments more affordable.
When are offset mortgages a good idea?
Offset mortgages are a good idea if you’re a strong saver. A healthy savings account can bring down the amount of interest you pay on your mortgage, giving you some financial freedom.
However, just as with every financial decision, there are pros and cons to getting an offset mortgage. It’s important to consider your personal circumstances and weigh up how an offset mortgage will benefit you.
Advantages and disadvantages of offset mortgages
Your financial situation and the potential savings from – well, your savings! – can make it an easy decision. But there are still some drawbacks to consider.
An offset mortgage can help you save money on interest, but it also gives you added options on how to manage your mortgage repayments.
- Shorten the term of your mortgage. Keep making the same payments every month and, as you’ll be paying less on interest, you could shave months or years off your term.
- Reduce monthly repayments. Stick with your original end date and you could benefit from lowering your monthly repayments.
You can even continue to access your savings – they aren’t locked away for the duration. You’ll save even more if you make further deposits – but also would pay more back in interest when you make withdrawals.
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 child’s mortgage, could dramatically reduce the rate of interest they pay each month.
The main drawback of an offset mortgage is the effect it has on your savings. You’ll pay less interest for your mortgage but you won’t earn any interest on the savings you build. If you’re a saver, 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 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 your requirements, as well as your personal financial situation and guide you in the right direction.
Can I still withdraw from my savings?
Yes, you will still have complete access to your savings with an offset mortgage. Just note that you will save less on your mortgage’s interest rates as you withdraw more.
Can I pay more monthly?
Some lenders will allow customers to overpay on repayments across the year. This is generally up to 10%, but there are likely to be limits on how much you can pay. If you pay too much, you may incur a charge for early repayment.
How much time can I cut off my mortgage term>?
It depends how much you already have in your savings, but even a small amount can shave time off. If you have a mortgage of £100,000 and a savings account that totals £3,000, you could shorten your mortgage term by 10 months. The more you have in savings, the less time you’ll need to repay your offset mortgage.
Find out more about mortgages and other money matters with the Norton Finance Know How hub.