What is an offset mortgage?
With an offset mortgage, the lender will take your savings into account when working out the interest part of your monthly mortgage payment. Your savings balance is offset against your mortgage balance and you are only charged interest on the difference between the two. This reduced interest liability can either reduce your monthly payments or shorten your mortgage term. This offset calculator will help you get an idea of the potential interest savings that come with an offset mortgage.
Why choose an offset mortgage?
With the current low savings rates offered by high street banks compared to mortgage interest rates, your savings may work better for you if offset against you mortgage. The interest you save with an offset mortgage is worked out at the mortgage rate rather than the lower savings rate.
You could use your savings towards a bigger deposit or towards overpayments if you opt for a normal mortgage. Doing this, however, takes away your option to access the money if the need arises in the future. With an offset mortgage, you could have instant access to your savings. Any money you withdraw simply reduces your savings balance and thus reduces the interest you save.
As opposed to keeping your savings in a savings account, you don’t earn interest on savings linked to your offset mortgage. Consequently, you are not liable for any income tax from earned interest.
Points to consider
- Not all lenders offer offset mortgages. Therefore, choosing an offset mortgage will reduce the number of deals available to you and in some cases, an offset deal may not be possible at all.
- Lenders sometimes charge higher mortgage rates for offset mortgages than they do for their normal mortgages.
- The spread between mortgage rates and savings rates has been narrowing recently, so you may be better off keeping your savings separate from your mortgage.
- Your level of earnings will decide the tax savings on the forfeited interest from the savings that you link to your offset mortgage. You may be better off with a standard mortgage if you are in a low tax bracket and with little savings. On the other hand, you may benefit more from an offset mortgage, if you are a higher rate tax payer with considerable savings.