What is an offset mortgage?
An offset mortgage works by linking your savings to your mortgage balance. Offsetting your mortgage reduces the amount of interest you are charged, allowing you to pay off your mortgage sooner.
How an offset mortgage works: if you have a £100,000 mortgage and £20,000 in linked savings via an offsetting arrangement, you’ll only pay interest on £80,000. This means you could pay off your mortgage more quickly.
Benefits of an offset mortgage
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. Here are some of the advantages linked to offset mortgages:
- Mortgage interest will outstrip your savings interest: Mortgage interest will usually be charged at a higher rate than the interest paid on your savings. So, if you use your savings to avoid paying mortgage interest, your money will be working harder.
- Instant access to your savings: Your savings are not locked up for the duration of the mortgage term, as you can usually get access to your money whenever you need it. Any money you take out of the savings simply reduces the amount being offset against your mortgage.
- Quicker way to pay back your mortgage: Another option with a standard mortgage is to pay more than the required minimum. But this is less flexible than the offsetting route because you will not usually be able to access that overpaid money in the future.
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 the chance that an offset will be the best option. But if you’re in any doubt, it’s probably worth having a chat with a mortgage broker who can help pick the right deal for you.
It is also worth remembering that when you offset your savings against a mortgage, you won’t earn any interest on that money in the same way that you would if it was simply in a savings account.