What is an offset mortgage?
An offset mortgage works by matching your savings to your mortgage. You then only pay interest on the slice of debt above your savings balance. This reduces the amount of interest you are charged, allowing you to pay off your mortgage sooner. This could potentially save you thousands in mortgage interest.
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
Given savings returns are so low, offsetting can be one way to make your money work harder. Advantages to offset mortgages include:
- Mortgage interest saved is higher than potential savings interest earned
- You retain instant access to your savings
- Accelerates mortgage repayment
Mortgage interest is usually charged at a higher rate than interest paid on savings. So, if you use your savings to avoid paying mortgage interest, your money will be working harder.
Your savings are also 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.
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.