Is Now the Time to Offset and Save?
Written on 23 March 2020
An offset mortgage can be an effective way of reducing the interest you’re paying on your mortgage and ultimately can help you to pay your mortgage off sooner.
An offset mortgage is offered on much the same terms as a traditional mortgage, with the same choice of fixed, variable and tracker rates available. However, an offset mortgage offers one very significant difference - a linked savings or current account.
When the your offset lender calculates your monthly mortgage payment, they take account of the credit balances in your linked savings or current account and effectively deduct these from your mortgage balance before calculating the amount of interest you owe.
As an example, if you have a £200,000 mortgage and £50,000 in your linked current or savings account, the lender will only charge you interest on a mortgage balance of £150,000 - the difference between the two. This results in a fairly significant interest saving.
How Does This Affect Your Monthly Payments?
There are 2 main types of offset mortgage: payment reduction and term reduction.
With a payment reduction offset mortgage, your overall monthly payments will change depending on how much interest you’re charged that month. This means that, if you have savings in your linked savings account, your interest payments and therefore your overall monthly payments – whether you’re on a repayment or interest-only mortgage - will be less than if you had a normal mortgage with no linked account. Your mortgage term will remain the same.
With a term reduction offset mortgage, your overall monthly payments remain the same, irrespective of how much you have in your savings account and how much interest you’re charged that month. Term reduction offsets are exclusively repayment mortgages, which means when you make a monthly payment – made up of capital and interest payments – you effectively make overpayments on your mortgage. This can lead to you paying it off quicker and paying even less interest over the full term of the mortgage.
What Are the Advantages of an Offset Mortgage?
Rather than having money sat in a savings account, with diminishing returns from saving rates, a term reduction offset mortgage can potentially allow you to pay off your mortgage quicker.
Some lenders may also give the option to reduce your monthly payments, meaning that the monthly amount you pay on your mortgage is based on the value of your outstanding mortgage minus the money offset in savings
Another benefit of offset mortgages is that they allow you to have easy access to your savings, whilst reducing how much interest you’re paying on your mortgage loan. Ultimately, an offset mortgage gives you flexibility.
What Are the Disadvantages of an Offset Mortgage?
A possible drawback of an offset mortgage is the fact that it may come with a lower LTV (loan-to-value). This means you may need to put down a larger cash deposit. Offset mortgages are more complicated for the lender to administer in comparison to traditional mortgages, as a result, rates can be slightly higher.
Furthermore, not all lenders offer offset mortgages, so choices may be limited, and you may be offered less competitive rates.
Finally, offset mortgages aren’t necessarily the most cost-effective solution for everyone. This is why it’s important to speak to a whole-of-mortgage broker to ensure you’re getting the right mortgage for you.
Who Could Benefit from an Offset Mortgage?
Anyone with significant savings of at least 10% of their mortgage loan could potentially benefit from an offset mortgage.
But offsetting can be particularly beneficial for:
- Higher rate taxpayers – you may want to consider an offset mortgage if you could benefit from paying no tax on your savings because with an offset mortgage the lender isn’t “paying” you interest on your savings. Instead, they’re reducing the amount of interest which you pay to them
- Self-employed – if you’re saving money to pay a tax bill, this can be done in an offset savings account. Equally, instead of keeping your cash reserves in a business account you pay for, you could withdraw this money and link it to your mortgage. If this is something you’re considering, its recommended that you speak to your accountant first
- Those undertaking home improvements – you may need to borrow a large amount for home improvements and then pay the builders in tranches. Using an offset in this circumstance allows you to reduce your mortgage as you wait to pay out your funds, bringing the overall cost down.
- Landlords looking to buy more properties – if you’re a landlord, you can have your rental income paid into a savings account linked to your own residential offset. This can help reduce your own mortgage interest.
It’s important to discuss any possible advantages and disadvantages of an offset mortgage with an independent mortgage broker, before making any final decisions. If you don’t have much in your savings, the money held in the offset account is unlikely to save you much in mortgage interest. In this case, it might be better to choose an alternative deal with a lower interest rate.
For more information on the different types of mortgages, don’t hesitate to contact us on 0330 433 2927 or enquire now.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.