What is an Offset Mortgage and How Does it Work?

When you are looking at the best mortgage options, your whole financial picture should be taken into account to enable you to find the mortgage deal that works best for you. If you have savings but you do not want to directly use them for a deposit, another option you can consider is taking out an offset mortgage.

What is an offset mortgage?

An offset mortgage enables you to reduce your mortgage interest by linking your savings to your mortgage. Your savings remain in the savings account, but the amount is offset against your mortgage.

For example, you have £30,000 in a savings account and a mortgage of £200,000. The savings are offset against the mortgage, so you only pay interest on the £170,000 of the mortgage loan. This type of arrangement is able to save people money in some circumstances, where the interest rate of the mortgage is higher than the savings interest rate.

How does it work?

To be able to qualify for an offset mortgage, the applicant would be required to have savings that are held with the same provider as the mortgage. The savings stay in the account and are not used to pay off the mortgage, but the lender will not charge mortgage interest on the equivalent amount of the savings. This is instead of earning interest on your savings, as you choose to reduce the mortgage interest instead. Opting for an offset mortgage means that you can still access your savings if you need to.

Should you get an offset mortgage?

An offset mortgage suits some people but not everyone. In a lot of situations, an offset mortgage is used as an alternative to a guarantor mortgage, where a parent or guardian uses their savings to help children to get onto the property ladder. It allows parents to give their children financial help, while still being able to access their savings in the event that they need to.

Before deciding to take out an offset mortgage, it is important to evaluate the different mortgage options to calculate whether the offset option is more financially beneficial. There are only a few offset mortgage deals available on the market, so you will probably need to use a broker to find one that is right for you.

Your broker will also be able to use their knowledge and expertise of the mortgage market to identify whether an offset mortgage is the best option, or if you should take out a different type of mortgage.

Pros & cons of an offset mortgage

Pros

• By opting for an offset mortgage, you can pay off your mortgage earlier or reduce the amount of the monthly payments.
• You pay no tax on the interest that you save, which often provides savers with tax savings.
• You can easily access the savings whenever you need to.
• You could save more interest than you would be able to earn in a savings account.

Cons

• Your savings will not be earning any interest over the term of the mortgage.
• Your savings do not grow, so they will not be as useful as you might have originally planned, for example if you were planning on generating income from your savings.
• There are not many offset mortgages on the market.
• Some offset mortgages have higher interest rates than standard mortgages.

Overpaying your offset mortgage

Some providers will give you the option of overpaying your offset mortgage, which will help you to save interest but you will not usually be able to get that money back at a later date.

Who are offset mortgages suitable for?

Offset mortgages are generally a good option as an alternative to a guarantor mortgage, or an option for parents to help their children buy a property without needing to withdraw any of their savings. So, if having the option to be able to access savings is a priority, this could be the better option.

People who are looking to make tax savings can also benefit from choosing an offset mortgage instead of being charged the tax on their savings.

With savings rates being particularly low in recent years, offset mortgages can help savers to make the most of their money, by reducing mortgage interest rather than making interest on their savings.

As an example, if you had savings with an interest rate of 1% and your mortgage interest rate is 3%, you would be saving more than you could earn in interest on your savings.

To determine whether an offset mortgage is the right option, you can speak to a whole of market mortgage broker to find out whether it will be favourable to a different type of mortgage. An experienced broker will be able to take all of the relevant details such as the mortgage loan amount, savings amount, preferred term length, income and credit history to evaluate your options.

Boon Brokers is an experienced mortgage broker who can help you to find the most suitable type of mortgage. We can perform market comparisons to ensure that you are able to access the best type of mortgage to suit your circumstances and advise you on the advantages and disadvantages of each option.

Offset mortgages are not available from many lenders, but as a whole-of-market broker, Boon Brokers is able to find deals that are not directly available through lenders.

Contact us for free, impartial mortgage advice and we can help you to find the deal that will work out financially most beneficial to you over the mortgage term.