Offset mortgages

Learn more about offset mortgages

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An offset mortgage allows you to offset your savings against the amount you owe on your mortgage, reducing how much interest you pay.

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What is an offset mortgage?

An offset mortgage allows you to balance your savings against what you owe on your mortgage - and such deals are becoming increasingly popular among the nation's homebuyers.

An offset mortgage links your savings, and in some instances your current account, to your mortgage. As a result, instead of earning interest on your savings, you save paying interest on part of your remaining debt.

This is worthwhile because the interest charged on a mortgage will usually far outstrip what is earned on a savings account.

How does offsetting work?

If, for example, you had a £100,000 mortgage and £20,000 in savings offset against it, you would only pay interest on £80,000.

So in crude terms, instead of paying, say, 3% interest on £100,000 (£3,000) in a year, you would pay 3% on £80,000 (£2,400) - a saving of £600.

A £20,000 savings account earning 1.5% would yield £300 in a year. So the net saving would be £600 off the mortgage less the £300 lost savings interest - leaving you £300 to the good.

Note that your actual monthly mortgage payments will probably still be based on the full £100,000 loan, meaning you effectively overpay each month. As a result, you will pay off your mortgage more quickly than would have otherwise been the case.

Some lenders will let you calculate your monthly payments based on the value of the outstanding mortgage once the savings have been offset. However, while this may help bring down your monthly repayments, you won't pay your mortgage off any quicker.

The most flexible offset mortgages allow you to ‘draw down’ on accumulated overpayments, meaning you can temporarily reduce or suspend monthly repayments if necessary.

Offset mortgages only account for about 6% of the total mortgages although with savings rates in the doldrums because of the low Bank of England base rate, they are becoming more popular. If you are looking for a new mortgage, an offset is definitely worth considering - it won't be the right option for everyone though. 

What types of offset mortgage are available?

As with standard mortgages, there are both fixed interest and standard variable interest rate (SVR) offsets. Fixed rate options tend to be more popular, and in 2016 they accounted for the largest proportion of all offset mortgages by a significant margin.

Fixed 5-year is the preferred Offset Mortgage plan

MoneySuperMarket/London & Country data, 2017

 

Most people go for the fixed 5-year option, with the second most popular choice being the fixed 2-year offset, indicating that stability is one of the key things that people are looking for in an offset mortgage. In fact, where tracker mortgages have plummeted in popularity and discounted rate mortgages have also faced a dip, fixed rate mortgages remain the first choice for many house-buying Brits:

Preferred offset mortgage 2015-16 vs 2016-17

MoneySuperMarket/London & Country data, 2017

 

There was a 6% increase in the number of fixed rate offsets taken out between 2015-16 and 2016-17, making them far and away the leading option for buyers who choose to take out an offset.

It’s worth remembering that most of the offset products currently available require a deposit of at least 25% of the property’s value.

Some deals will allow you to offset your current account as well as your savings account. You may also be able to link your cash ISA, if you have one. The more savings products you can link to your mortgage, the harder your cash will be working to reduce your debt.

It is important to note however, that your savings and mortgage have to be with the same provider - you can't link a savings or current account to your mortgage if it is with a different bank or building society.

What are the advantages of offset mortgages?

The main benefit is the flexibility you get, as you can retain access to your linked savings account, meaning you can dip into it as and when you need to.

You can also use a linked current account as normal, with the balance counting against the mortgage debt until you spend it.

By contrast, if you'd used money from your savings pot to overpay your mortgage and then decided you needed some of that cash back, you would not always have the same flexibility.

If you have savings as well as mortgage debt, an offset mortgage can offer the best of both words, as you will still be able to access that nest egg. However, you need to be aware that, if you withdraw money from your savings at any point, there will be less in the pot to offset against the mortgage.

Not for everyone though...

While an offset mortgage will work well for many people, offsetting won't be the most suitable option for everyone

You tend to pay a slightly higher rate of interest than on a standard mortgage, although the premium has narrowed in recent years. But it means that if you don't have much in savings, offsetting may not work out to be best value.

With this in mind, it’s not really a surprise that the average age of people who take out an offset mortgage is slightly higher than those who take out regular mortgages:

Average age profile: Offset vs Regular

MoneySuperMarket/London & Country data, 2017

 

Offsetting also tends to give you a lower loan-to-value (LTV) than is available on typical non-offset mortgages. This means that you need to provide a larger cash deposit for offset mortgages than for regular mortgages, so they’re probably not ideal for first-time buyers or those who don’t have too much money available for a deposit. However, if you do have savings, an offset mortgage can be an excellent option.

Average LTV: Offset vs non-offset mortgages

MoneySuperMarket/London & Country data, 2017

 

There is no hard and fast rule which says if you have more than £x amount in savings, then an offset is the best option - it will depend on the mortgage and savings rates available at the time. 

How can MoneySuperMarket help?

In the past, borrowers opted for a standard mortgage without giving it a second thought, but as offset deals have become more affordable, an offset is now an option that's definitely worth considering.

At the same time, as rates have fallen, more lenders have entered the offset arena, with some now offering an offset option across their whole range of mortgage products. That said, not all lenders offer offsets.

One of the best ways to see what offset mortgage products are available is to use a comparison site. With MoneySuperMarket you can compare the rates available on offset and standard mortgages to work out which is most suitable for you and then apply online.

And remember, when comparing mortgages it is important to factor in the arrangement fee as well as the interest rate as fees vary significantly.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The figures and information provided by this tool are for illustration purposes only

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