Buying a house is one of the biggest purchases that you will ever make, so choosing the right mortgage is vital. The structure you choose can make a significant difference to how much interest you pay and how quickly you clear the loan.
Offset mortgages are an option worth understanding, especially if you already keep savings to one side. Let’s break down what they involve and whether they will suit your circumstances.
What Is an Offset Mortgage?
An offset mortgage links your savings, and sometimes even your current account, to your mortgage balance. So instead of earning interest on savings separately, the balance is used to reduce the amount of mortgage debt that interest is calculated on.
For example, if you have a £160,000 mortgage and £15,000 in linked savings, you would only accrue interest on £145,000. This is because your linked savings are used to reduce the balance on which your mortgage interest is calculated.
Your savings remain accessible and still belong to you, but they work against your mortgage rather than sitting separately. This means you can reduce the interest you pay while still having access to your money when needed.
How Does an Offset Mortgage Work?
Each month, the lender calculates the interest on your outstanding mortgage balance after deducting the money held in your linked accounts. You are usually able to decide whether the reduced interest is used to shorten your mortgage term or reduce your monthly payment; this does depend on the lender or product, though.
An offset mortgage can involve multiple linked accounts, so keeping track of your offset balance may require more attention than a standard capital repayment mortgage. This is why getting the structure right from the beginning is important.
One point worth noting for UK borrowers is that, as you aren’t earning taxable interest on offset savings, there is no personal savings allowance to use up or exceed. This can make offsetting especially efficient for higher and additional-rate taxpayers, who would otherwise lose more of their savings interest to tax.
Are Offset Mortgages Worth It?
Whether an offset mortgage is worth it depends on your personal situation. This mortgage type tends to suit borrowers with substantial, stable savings who don’t need constant access to high-interest savings products. This makes them often a great fit for self-employed clients who need to set money aside for tax bills, or anyone wanting flexibility to use savings without formally making a mortgage overpayment.
However, it is important to consider that they’re less suited to individuals with modest savings, as the offset product rates can be higher than standard fixed or tracker deals. This means that the offset benefit needs to outweigh that premium.
Having substantial savings does not automatically mean an offset mortgage will be the cheapest option. The mortgage rate and the amount you keep in your linked accounts both need to be considered.
Whether an offset mortgage works out cheaper than a competitive standard rate depends on your savings balance, tax position and how long you are intending to hold the product. This is exactly the kind of comparison that benefits from a proper affordability and product review instead of a rough estimate.
How Can Stuart Brown Mortgage Services Help?
At Stuart Brown Mortgage Services, we have access to products from more than 50 lenders and have more than 20 years of experience supporting clients across Bedfordshire, Buckinghamshire and Hertfordshire. We can talk you through whether an offset mortgage is genuinely suitable for your situation.
Get in touch today to discuss your options and find the right mortgage for you.
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