Offset Mortgages
The fancy rock stars of the mortgage product scene, offset mortgages offer a number of benefits and flexibility – but are they right for you?
An offset mortgage is a type of product and can be taken with either a fixed rate or something variable such as a tracker. But what exactly are they?
What are Offset Mortgages?
An offset mortgage is one where the lender opens a savings account alongside the mortgage account. Any savings in this account offset the mortgage balance, and interest is charged only on the difference.
For example:
- Mortgage balance: £150,000
- Savings: £50,000
- Interest is charged on £100,000 of the mortgage balance, and no interest is paid on the savings.
This structure allows you to access your savings while reducing the interest payable on your mortgage. You can use the savings account like a normal account, withdrawing and depositing money as needed.
The caveats of Offset Mortgages
Not all lenders offer offset mortgages, and those that do have different rules.
Some standard offset facilities don't let you change the monthly payment. When a balance is offset, you maintain your normal monthly payment, but the reduced interest means you pay off the mortgage faster.
More flexible offset products let you choose the benefit from the offset savings account. You can opt to reduce your monthly payment while keeping the term the same. Some providers even let you switch between these benefits throughout the year.
If you have a capital repayment mortgage, you always pay the capital part of your monthly payment, as only the interest is reduced. With an interest-only mortgage, you can completely offset the mortgage balance and make no monthly payment, but you must pay the full capital sum at the end of the mortgage term.
What do I need to do?
Offset mortgages often carry a slightly higher interest rate than the more straight-forward products so you need to know if it is going to be beneficial to use such a product. If you don’t have any savings to offset or you anticipate using the savings for something else in the short term then they may not be right for you. The real benefit comes from maintaining a savings balance for the long term and, in this instance, offset mortgages can save you thousands of pounds in interest.
If you are interested in offset mortgages but unsure if they are right for you, get in touch for a chat and we can work out the best option and advise on the most suitable approach for your circumstances.
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