Offset mortgages seem to have declined in popularity over recent years but I think they are a brilliant option for many borrowers, so here I explain exactly how they work.
How do offset mortgages work?
When you take out an offset mortgage, your lender opens a bank account for you, which is linked to the mortgage. The bank account doesn’t attract any interest but whatever you deposit in it “offsets” against your mortgage balance.
So, in the simplest of terms, if you have a £100,000 mortgage and £15,000 in your savings pot, you only pay interest on £85,000.
How flexible is an offset mortgage?
Very! You can put as much money into your savings account as you wish until the balance on your savings is equal to your mortgage balance; then you can simply pay the loan off in full.
The money in your savings account is instant access so you can draw funds out whenever you need them without having to give notice.
You can overpay on a flexible mortgage and also underpay or take payment holidays once you have built up some credit in your savings pot. There’s practically nothing you can’t do!
It’s tax efficient, too because the savings account saves interest on your mortgage rather than attracting interest on your savings, then you don’t pay any tax. Higher rate taxpayers love offset mortgages.
So, if they are that good, why hasn’t every- one got one?
Offset mortgages aren’t suitable for every borrower by any means.
Their popularity has dwindled somewhat over the years and only a handful of lenders now offer them.
Because this type of mortgage comes with more “whistles and bells”, then the interest rates offered to tend to be slightly higher than standard mortgages and fees can be higher, too.
If you do not have a decent level of savings behind you (which you may not have if you’re moving house) then an offset mortgage is not likely to be suitable because, essentially, you are paying for flexible features you will not use.
How do I work out if an offset mortgage is right for me?
If you are considering a remortgage from a standard mortgage to an offset, you will need to compare the interest rate you are paying on your current deal against the offset mortgage equivalent.
You also need to take into account any fees that will be incurred making the switch.
Typical fees could include an early repayment charge from your current lender, arrangement fees from the new provider and mortgage broker fee if you want to employ a broker to do the legwork for you.
Your UK Moneyman broker will also help you calculate how much interest you can save over the term of your mortgage and how quickly you can get it paid off by overpaying on a regular basis.
Why aren’t offset mortgages as popular as they used to be?
Personally, I think it’s just a supply and demand issue. Most people today don’t have the level of savings to take full advantage of the offset savings account.
If more people wanted offset, then more banks would come into the market, I’m sure.
Once you’ve decided to opt for an offset mortgage then you’re more likely to stick with that mortgage for a longer period of time rather than constantly hopping from lender to lender every few years.
As such, it’s important that you end up with the most suitable mortgage for you, so I’d recommend a free consultation with a UK Moneyman mortgage broker to weigh up the pros and cons.