What is an offset mortgage?
Many of us have benefited from cheap mortgage rates in recent years, but you might find you can trim even more off your monthly outgoings by considering an offset mortgage.
This type of mortgage is only worth thinking about if you have savings, however. These deals work by ‘offsetting’ your savings against what you owe on your mortgage, therefore reducing the overall amount of interest you pay.
So, if you have a £100,000 mortgage and £20,000 in savings with the same institution, with an offset you’d only pay interest on the £80,000 difference, which means you may be able to pay down your mortgage more quickly.
Some offsets even allow mums and dads or other relatives to link their savings to their children’s mortgage. The savings can still be held in the parents’ name and are accessible to them in the normal way.
Benefits of offsetting
Savers have had a pretty rotten deal over the past few years and, given that returns are so low, offsetting can be one way to make your money work harder.
The interest you are likely to be charged on your mortgage will usually outstrip the returns you can earn on your savings, and by moving to an offset you are basically saving at your mortgage rate, tax-free.
Remember that interest earned in a savings account is taxed (unless you’re a non-taxpayer and fill in form R85 to receive it gross). Tax at 20% is deducted automatically, and higher rate taxpayers have to account for the additional 20% or 25% in their tax returns. But with the offsetting technique, there is no tax to worry about.
Another big advantage of offsets is that you don’t have to lock up your savings for the duration of the mortgage term, as you can usually get access to your money whenever you need to.
You don’t have to lock up your savings for the duration of the mortgage term
If you simply used your savings to overpay on a standard, non-offset mortgage, you wouldn’t be able to get this money back. Offsets are therefore often used by people who are self-employed and build up their tax savings with their gross income over the course of year before handing over the due portion to the tax man.
Drawbacks of offset mortgages
While offset deals can look tempting, their biggest downside is that the rates charged on this kind of mortgage are usually higher than those on standard mortgages.
The margin between offsets and standard mortgages has narrowed in recent years, but it’s still worth doing the sums before applying for this kind of deal, so you can be certain you’re going to be better off with an offset.
Always compare lots of different mortgages and rates, remembering to factor any arrangement fees into the cost. The more savings you have, the greater than chance that an offset will be the best option. But if you’re in any doubt, it’s probably worth having a chat with an mortgage broker who can help pick the right deal for you.