Offset mortgages allow you to link your mortgage account with one or more savings accounts and can be a very effective way to reduce the cost of your mortgage.
An offset mortgage means your savings reduce the interest you pay which could potentially save you hundreds of pounds a year.
How does an offset mortgage work?
With a normal mortgage your lender will calculate the amount of monthly interest based on the amount of money you have borrowed. With an offset mortgage, the lender will set your savings against your mortgage so you don’t have to pay interest on the whole amount you have borrowed. Your savings are held as a separate pot of money and won’t actually be used to reduce the mortgage amount so they are still available to you.
You have a mortgage of £200,000 with an interest rate of 3.65%
With a normal mortgage your annual interest would be £7,300*
You also have savings of £20,000
With an offset mortgage, interest is only calculated on a balance of £180,000
Which is £6,750* a saving of £730.
*Assuming no capital repayment/rate quoted is for example purposes and does not represent an available rate.
Why choose an offset mortgage?
- Your savings will work to reduce your mortgage costs
- It gives you the ability to pay less interest on your mortgage
- You will have a choice of reducing your monthly payments or reducing the term of your mortgage by repaying more capital every month
- You still have access to your savings should you need them for another purpose, whereas if you use them to overpay on a standard mortgage you will no longer have that flexibility.
- You pay no tax on the interest you save, unlike interest earned in a normal savings account which is subject to tax. This can be particularly beneficial for higher-rate taxpayers.
- Offsetting can also be a great option if you’re self-employed as the money you set aside to cover your tax bill can be used to reduce the interest you pay on your mortgage in the interim.
Are there any downsides?
- The savings that are being used to offset against your mortgage won’t earn any interest
- The value of your savings will be eroded by inflation
For those with a relatively small amount of savings in comparison with their mortgage balance, an offset is usually not the best option.
Blackstone Financial Solutions can explore with you as to whether an offset mortgage is the right choice for your needs and guide you through the process.
Call our offices now on Bristol 0117 403 0097.
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