Last Updated on 18th September 2020
If you have adequate savings, an offset mortgage can be a great way to save even more money. Furthermore, you may be able to reduce the length of your mortgage term. This can have a huge advantage of becoming ‘mortgage-free’ earlier than you perhaps would do with a regular mortgage.
While this all sounds great, offset mortgages are hard to come by. This is because most lenders tend not to offer them, although there are some that still do. Furthermore, our advisors specialise in this field.
Find out if you’re able to save money on your mortgage by making an enquiry. Our advisors will then call you back to calculate what’s possible.
What is an offset mortgage?
An offset mortgage allows you to link your mortgage to your savings account. As a result, you can use your savings to offset the amount of interest you owe on your mortgage. This can be a great way to reduce the overall cost of your mortgage.
Rather than paying interest on your entire mortgage balance, you’ll be able to pay interest on your balance minus your savings. As you’re paying interest on a lower amount, you’ll save money on your monthly payments.
This doesn’t mean to say that your savings will be used to pay your mortgage. Your savings simply stay at the value they are and are used to calculate the amount you’re able to offset.
How can I reduce the amount I pay each month?
Imagine your mortgage balance is £150,000. You also have £50,000 in a savings account. Rather than paying interest on the £150,000 that you owe, you’d just pay interest on £100,000, as you have £50,000 in your savings account. This can reduce the amount you pay each month, as well as utilising your savings in an effective way.
An offset mortgage can also be used to reduce your mortgage term as opposed to reducing your payments. You may be comfortable in paying your mortgage and have no desire to reduce your monthly payments. In this case, reducing your mortgage term instead will give you the opportunity to become mortgage-free earlier.
Offset mortgage rates
It’s not uncommon for offset mortgage rates to be slightly higher than regular mortgage rates. After all, you’ll be using your savings to minimise your balance, so a slightly higher rate can be justified. Furthermore, you’re still likely to save money on your mortgage.
Even if you don’t have a lot of savings, a small amount can still bring your monthly payments down each month. A small saving each month can accumulate to a large saving when calculating the overall cost of your mortgage.
Many offset mortgage lenders allow borrowers to add to their savings account or withdraw funds when needed. If you withdraw funds, your mortgage payments will increase. On the other hand, adding funds to your savings account will reduce your payments further. This is because you’re able to offset more of your mortgage with a larger amount of savings.
Some mortgage deals may allow you to make overpayments. That being said, it’s often more viable to add the additional funds to your savings account. Although an overpayment will bring your mortgage balance down, adding additional savings will also have the same effect. The only difference is that you’d still be able to access funds from your savings account, whereas once you make a mortgage payment, the funds are irretrievable.
Calculating how to save the most on your mortgage
Whether you choose an offset or a regular mortgage, it’s definitely worth calculating the costs involved before making a decision. With extremely low-interest rates, savings in a bank aren’t really giving you the benefit they potentially could.
An advantage of having an offset mortgage is that you’d potentially save more interest on your mortgage than you’d gain in a savings account. Furthermore, you may be liable to pay tax on any interest you make on your savings. In comparison, you’d pay no tax by offsetting your mortgage against your savings.
On the other hand, earning zero interest on your savings can be seen as a disadvantage. This is why it’s important to calculate which deals will save you the most money each month. Furthermore, an offset mortgage may allow you to pay your mortgage off in full much sooner than anticipated.
Offsetting your mortgage can also enable you to use your savings as security for a mortgage deposit for a child or family member. This can be great for when you don’t want to gift a mortgage deposit but would consider being a guarantor instead. Once part of the mortgage is repaid, lenders typically allow guarantors to access funds as they no longer need security for the loan.
How mortgage advisors can help
We understand that calculating and comparing mortgages can be difficult. This is especially true when trying to compare hundreds of lenders each with their own mortgage products. Furthermore, trying to assess whether an offset mortgage would save you more money than a regular mortgage isn’t an easy task.
Mortgage advisors can calculate each deal with the lenders you’re eligible with. We’ll also compare whether an offset mortgage would be better suited than a regular deal. In doing so, you’re able to see which deal will save you the most each month.
You’ll also have to consider the costs and fees involved with certain mortgages. Although you may think a lower mortgage rate will save you more money, fees can have an impact on the overall cost of your mortgage. This is why speaking to an advisor can be so beneficial.