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Offset mortgages are a great way to save money. They can either help you reduce your monthly payments, or shorten the term and help you get mortgage free sooner.
But so many of us do not understand them - some do not even know they exist!
Offset mortgages are a type of product that let's us link our mortgage with our savings. A savings account is usually set up alongside your mortgage. The savings balance is used to reduce the amount of interest charged on the mortgage. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest.
You have a mortgage of £200,000 and savings of £30,000.
£200,000 Mortgage – £30,000 Savings = £170,000
Your savings will offset against your mortgage so that you will only have to pay interest on £170,000 of your mortgage.
This could potentially save you hundreds of pounds in interest which could benefit you in one of two ways, it is up to you to choose how to benefit from the interest you save.
While your monthly mortgage repayments stay the same each month (subject to changes in mortgage rates), the amount of mortgage interest you need to pay is lower due to your offset savings. More of your monthly mortgage payment is therefore used to repay the balance of your loan which effectively means you are making mortgage overpayments each month. This could allow you to pay off your mortgage sooner and save thousands of pounds in interest.
With this option, the term of your mortgage remains unchanged, but your monthly mortgage payment is reduced. This is because the offset benefit you earn each month from the savings in your savings account is in effect used to reduce how much mortgage interest you pay the following month.
This means your savings could give you more disposable income each month. And, in addition to reducing your monthly payment, you could also save thousands of pounds during the term of your mortgage.
Once your savings are offset against your mortgage, you can still add to them, more money offset means more interest saved.
Some offset mortgages also allow you to overpay – this will have the same effect of saving you interest but with one big difference…
Overpaying means you physically repay part of your mortgage which means you may lose access to this money if you need it later. Offset savings on the other hand, remain alongside the mortgage, they don't repay it, so you still have access to your money.
As opposed to becoming a guarantor, or physically giving your child money towards buying a new home, offset mortgages offer a great alternative. Some offset mortgages allow family to offset their savings against a relative's mortgage. The benefits are that:
• The mortgage holder saves interest whilst the savings are offset – they can either benefit from lower payments or from a shorter term.
• The parent retains control and ownership of their money, whilst helping their child through the expensive early years of home ownership.
• Offset mortgages offer a great way for parents to help their child, without physically giving the money to them if they cannot afford to.
• The parent can then transfer their money into a normal savings account, once the child is ready to take on their own mortgage fully.
Offset mortgages are a great way to save interest on your mortgage, but there are disadvantages as well.
Pros
✔ You could save more interest than you could earn in a savings account
✔ You do not have to pay tax on the interest you save - you would have to pay tax on any interest earned in a normal savings account (apart from cash ISAs)
✔ You can access your savings easily (but remember the mortgage payment may go up if you make a withdrawal from your savings)
✔ You could finish your mortgage sooner, or pay a lower monthly payment
✔ You could help a child or relative get onto the property ladder
Cons
✘ Your savings do not earn interest.
✘ Your savings will lose their spending power as they will not grow (you'll be saving money instead)
