By Mark Hooson on Monday 21 March 2016
In this Article
Offset mortgages provide a practical and sophisticated means of balancing your savings against the debt of your mortgage – and they are becoming increasingly popular among the nation’s homeowners.
What is an offset mortgage?
An offset mortgage links your savings, and in some instances your current account, to your mortgage. As a result, instead of earning interest on your savings, you pay less interest on your mortgage.
For example, if you had a £100,000 mortgage and £20,000 in savings offset against it, you would only pay interest on £80,000. However, your monthly mortgage payments will probably be based on the full £100,000 loan meaning you effectively over pay each month. As a result not only do you pay less interest on your mortgage, you will also pay it off more quickly.
Some lenders will let you reduce your monthly payments so that they are based on the value of the outstanding mortgage once the savings have been offset. However, while this may help bring down your repayments you won’t pay your mortgage off any quicker.
Offsetting can also be extremely tax efficient. Ordinarily you pay income tax on any interest you earn on savings (apart from ISAs). However, if you offset your savings against your mortgage, you don’t earn any interest so there is no tax to pay.
Offset mortgages only account for about 6% of the total mortgages although with savings rates in the doldrums because of the low Bank of England base rate, they are becoming more popular. If you are looking for a new mortgage, an offset is definitely worth considering – it won’t be the right option for everyone though.
What types of offset mortgage are available?
As with standard mortgages there are fixed and variable rate offsets available. However, most of the offset products currently available require a deposit of at least 25%.
Some deals will allow you to offset your current account as well as your savings. You may also be able to link your cash ISA. The more savings products you can link to your mortgage, the harder your cash will be working to reduce your debt. It is important to note however, that your savings and mortgage have to be with the same provider – you can’t link a savings or current account to your mortgage if it is with a different bank.
What are the advantages of offset mortgages?
With an offset loan, you pay no tax on your savings interest, and the rate you earn is the same as your mortgage rate; as mortgage rates are typically higher than easy access savings rates, you effectively get a better return.
A key benefit is the flexibility you get, as you can always retain access to your linked savings account or current account, meaning you can dip into it at a future date as and when you need to.
By contrast, if you’d used money from your savings pot to overpay your mortgage and then decided you needed some of that cash back, you would not have the same flexibility.
While offset deals are particularly beneficial to higher-rate taxpayers and those with a large amount in cash savings, lower-rate taxpayers can benefit too.
If you have savings as well as mortgage debt, an offset mortgage can offer the best of both words, as you will still be able to access that nest egg. However, you need to be aware that if you withdraw money from your savings at any point, there will be less in the pot to offset against the mortgage.
Offsetting can be an especially useful option for the self-employed who put money aside for their tax bill, as these individuals can make their money work that little bit harder – before handing it over to the taxman.
Not for everyone though.
While an offset mortgage will work well for many people, offsetting won’t be the most suitable option for everyone.
You tend to pay a slightly higher rate of interest than on a standard mortgage, although the premium has narrowed in recent years. But it means that if you don’t have much in savings, offsetting may not work out to be best value.
There is no hard and fast rule which says if you have more the £x in savings an offset is the best option – it will depend on the mortgage and savings rates available at the time.
How can MoneySuperMarket help?
In the past, borrowers opted for a standard mortgage without giving it a second thought, but as offset deals have become more affordable, an offset is now an option that’s definitely worth considering.
At the same time, as rates have fallen, more lenders have entered the offset arena – with some now offering an offset option across their whole range of mortgage products. That said not all lenders offer offsets.
One of the best ways to see what offset mortgage products are available is to use a comparison site. With MoneySupermarket you can compare the rates available on offset and standard mortgages to work out which is most suitable for you and then apply online.
And remember, when comparing mortgages it is important to factor in the arrangement fee as well as the interest rate as fees vary significantly.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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