What is an Offset mortgage and why should I consider having one?
An offset mortgage is quite simply a mortgage with a linked bank account, usually a savings account and rather than you interest on the money sat in the account it reduces the interest you pay on your mortgage.
Why is this a good idea?
The interest on most savings accounts is close to 0% so you will barely earn any interest on your savings let alone protect your savings from being eroded by inflation. Say your mortgage has an interest rate of 3.15%. In effect if you have money in your offset account it’s like the equivalent of getting 3.15% interest on your money.
How does this work in practical terms given you don’t receive interest?
Good question. You have 2 options;
Option 1 – Reduce your monthly mortgage payment
This is where your monthly payment reduces according to how much you have in your offset account. Let’s say you borrowed £200,000 over 25 years and had £40,000 of available savings. Let’s also say instead had you left it in your savings account and received a market leading 1% on your instant access savings, over 25 years you would have been £12,713 better off compared to paying your standard mortgage payment and receiving interest on your savings. Good huh?
Option 2 – Keep your mortgage payments the same and pay the mortgage offer early
Using the same example above you will have saved £26,515 compared to not having the money in the offset account. Also, because your mortgage payments remain the same, less of your payment each month goes towards the interest payment that month, and reduces your mortgage balance quicker. This compounds over the term of the mortgage, so much so that you will have paid your mortgage off 3 years and 5 months early. WOW!
The benefits would increase further of course if you added more money to the offset account in the future whether as one of payments or regular payments from surplus earnings for example.
What type of client would benefit from this?
The obvious one is someone who has a reasonable amount of savings to offset against their mortgage balance. The not so obvious one is the self-employed. If you put money aside each month for tax (and even VAT if you’re VAT registered) this could be sat in your offset account until you need to make your tax payment. It’s almost like the tax man is doing you a favour and saving ‘no I don’t need the tax money just yet so let me help you reduce your mortgage payments or pay the mortgage offer early in the meantime”. Nice.
Where’s the catch?
There is no catch. BUT this type of mortgage does attract a higher rate of interest because there are increased costs for the lenders of offering such a flexible feature. If you have little in the way of money to keep in the offset account for much of the term this may not be the product for you and not worth the increased cost. If this is of interest and wish to know how much you could save or how soon you could pay your mortgage off get in touch. You could be mortgage free sooner than you think.
Your home may be repossessed if you do not keep up repayments on your mortgage.