Offset mortgages explained

Offset mortgages may be familiar in name – but do you really understand their features and benefits? Here’s a quick guide.

What is an Offset mortgage?

Usually linked with one bank account (but sometimes more), an Offset Mortgage allows the money in your savings account to be counted as temporary overpayments towards your mortgage.

However, your savings remain accessible so you can still get to them if you need to.

Why might you choose an Offset mortgage?

Taking out an Offset mortgage enables you to use your savings to reduce your mortgage balance and therefore the interest you pay on it. For example, if you borrowed £200,000, but had £50,000 in savings, you would only be paying interest on £150,000.

Offset mortgages can be more expensive compared to a standard deal, but they can help to reduce your monthly payments, whilst still giving you access to your savings.

Advantages of Offset Mortgages

• As you pay less interest, Offset mortgages can help reduce your monthly repayments, or enable you to repay your loan early.
• You maintain access to your money, should you need it.
• Deals can be quite flexible, allowing you to offset savings and current accounts against your mortgage.

Disadvantages of Offset Mortgages

• Money held in Offset accounts won’t earn you interest.
• If you don’t have much saved, you won’t save much on the mortgage, meaning it may be better choosing an alternative deal with a lower interest rate.
• Offset mortgages are usually more expensive than standard deals

When is it worthwhile to get an offset mortgage?’

If you have a mortgage rate that is higher than your savings rate (after tax), you may find yourself better off by offsetting – even if you don’t have a high savings balance.
In addition, you have the added security of being able to access your savings at any time (unlike making overpayments on a traditional mortgage).

An Offset mortgage may be even more appealing if you’re a higher rate tax payer. As there is no interest paid on the money in an Offset savings account, there is no tax liability.

Offset mortgages can offer real financial benefits if you have a mortgage and some savings. By seeking professional advice, you will gain a clearer picture about whether it’s the right choice for you.