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What are the benefits of an offset mortgage?

What are the benefits of an offset mortgage?
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    Would you like to pay less interest on your mortgage each month? Use your savings to reduce the amount of interest you pay over the term of your mortgage.

    What is an offset mortgage?

    An offset mortgage is one which is linked to a savings account and sometimes also a current account. Any money in the savings account can be used to reduce the overall balance owing, which means you’ll pay less interest on your mortgage.

    How do offset mortgages work?

    Offset mortgages work by ‘offsetting’ the balance in your savings account against the mortgage balance so the interest you pay on borrowings is reduced.

    Benefits of offset mortgages

    There are several benefits of offset mortgages, but the largest one is the opportunity to reduce the amount of interest you need to pay each month. This can create a considerable saving over the mortgage term, helping to lower monthly payments.

    The offset savings will not attract interest, so there is zero income tax to pay, but the savings will reduce the interest on your mortgage payments. If you continue to pay the same amount each month, it will reduce the mortgage term and repay the loan quicker.

    This type of loan offers the borrower flexibility around monthly payments – you can choose to make lower monthly payments when money is a bit tight or pay off more of the balance if you receive a bonus, for example.

    Some lenders will allow you to add multiple savings accounts and even ISAs to your offset to maximise the interest saving you can make.

    Clients can raise money for future use and then not pay interest on the money until it is drawn from the offset account, this works well for property investors buying buy-to-lets or developments as they can have funds in the offset savings accounts, ready for the investment to come up.

    What are the drawbacks of offset mortgages?

    Offset mortgages do have a number of potential drawbacks though:

    • There are fewer offset mortgage lenders than traditional types of mortgages so it can be more challenging to find a provider.
    • Offset mortgage rates tend to be higher than the equivalent amount on a standard mortgage. This is because there are limited providers of offset products.
    • Many offset mortgage providers will require at least 20% deposit and some will want 25% which may rule out this type of mortgage deal for you if you require more than 75% LTV.
    • Your savings account and any other linked accounts will probably need to be with the same provider.
    • An offset mortgage allows you to access your savings balance without having to remortgage.

    Additional things to consider when thinking about an offset mortgage

    There are a few other conditions you’ll need to take into account regarding how offset mortgages work:

    • Your savings won’t earn interest if they are used to offset a mortgage.
    • Some mortgage lenders require a minimum balance in your offset savings account. They may also apply minimum withdrawal amounts.
    • Any withdrawal you make from your linked savings account will affect the interest saving you can make.

    Other types of offset mortgages

    There are also two other types of offset mortgage for different circumstances:

    Family offset mortgages

    A family offset mortgage is for residential properties. These mortgages allow parents to help their children get on the property ladder by opening an offset savings account linked to their child’s mortgage balance.

    The advantage of this type of mortgage is that parents can help to reduce the amount need to borrow without having to actually give the cash as a deposit. This could enable their child to buy a bigger house, get a better mortgage interest rate, reduce monthly payments, pass lender affordability criteria and even pay off the mortgage sooner.

    Buy to let offset mortgage

    A buy-to-let offset mortgage is for landlords who have savings that they wish to use to reduce the mortgage debt and benefit by paying less interest during the mortgage term.

    Get in touch with Simmonds Mortgage Services today

    As an experienced mortgage broker, we deal with all types of lenders across the whole market, so if you are interested in finding out whether an offset mortgage deal could be a good option for you, give us a call on 01184 693037.

    FAQs about offset mortgages

    To learn more about offset mortgages, check out our frequently asked questions below or contact us today:

    How is interest calculated on an offset deal?

    Your lender will take your outstanding mortgage balance minus any linked savings to work out the net balance owing and interest will be applied to it.

    Is an offset mortgage the same as a repayment mortgage?

    Unlike a standard repayment mortgage which you can overpay, an offset mortgage means you can still access your savings without having to remortgage or ask your lender. Some of our clients chose to release funds from a property and instantly put them into the linked offset account to reduce the mortgage payments.

    However, they then have access to the funds in the future without the need to refinance, this works well for property investors who may be looking to invest in buy-to-lets or even someone doing a long-term development where the funds aren’t needed all at once.

    Can you offset 100% of your mortgage?

    Yes, you can offset 100% of your mortgage with savings which would mean that you would not have to pay interest on your loan. In addition, you would not have any tax to pay on your savings since this would not be earning interest.

    What happens if your savings are more than the loan balance?

    Usually, lenders will offset interest on the amount up to the home loan balance, but they won’t pay credit interest on the additional savings in your account. However, check the deal as some may offer interest on your saving above the loan amount.

    Are offset mortgages tax-free?

    An offset mortgage enables you to avoid any income tax on the interest you might earn on your savings.

    Can you overpay on an offset mortgage?

    Yes, you can usually overpay an offset mortgage, but some lenders may limit this to a certain percentage per year. Make sure to read the small print so you understand the terms and conditions of your offset agreement.

    Is it better to overpay or have an offset mortgage?

    This depends on many different factors, so it’s hard to give a definitive answer that would apply to everyone. However, if you have significant savings that you want to hold onto for a rainy day for example, then an offset mortgage gives you the benefit of the offset savings without you actually paying down your mortgage balance.

    Should you put down a bigger deposit instead of offsetting?

    Again, this depends on your circumstances, but larger deposits will generally give you access to a wider range of lenders and mortgage deals with lower interest rates.

    How much interest can you save with an offset mortgage?

    The potential savings when using an offset mortgage could be significant. You could offset your savings account and your current account to maximise the offset amount. You should consider the effect that a higher interest rate on this type of mortgage might have on overall interest costs during the life of the mortgage.

    Will you still get interest on your savings?

    No, this product uses savings to reduce the balance owing, so you will not receive interest on your savings.

    Can other family members help by depositing savings in your offset account?

    Some offset savings account providers will allow parents, siblings, grandparents and even aunts and uncles to link their savings accounts to your account to help reduce the interest charged, save money and even pay off your mortgage early.

    Can you access your savings easily?

    Most mortgage lenders who offer offset mortgages will allow you to access your savings whenever you like subject to you leaving a minimum balance in your linked savings account. Remember that if you reduce your savings balance, this will increase the offset mortgage balance. You’ll owe more money, so your monthly mortgage payments will increase.

    Can an offset help you pay off a mortgage quicker?

    Yes, it’s possible to reduce your mortgage term and pay back your offset loan faster but be aware that there may be an early repayment charge as a result.

    Who are offset deals good for?

    Taxpayers who pay taxes at higher and additional rates can get all the benefits of saving income on the interest on their savings as well as keeping their Personal Savings Allowance by using offset mortgage deals. If you are self-employed and have to keep a significant sum in savings to pay tax bills, this can be a great way to lower monthly repayments and save money at the same time.

    How can you get an offset mortgage?

    The easiest way to find the right mortgage product is to use a mortgage broker to search the entire market on your behalf.

    Conclusion

    An offset mortgage can be a good option if you have a lump sum in a savings account with a low-interest rate. By offsetting the savings against the mortgage, you’ll save more in mortgage interest than you would earn in savings interest. You can also use the balance in your current account to offset and pay interest on the reduced balance.

    Looking for more information about mortgages? Check Andy’s blogs:

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    Andrew Simmonds

    Andrew Simmonds is the managing director at Simmonds Mortgage Services. He's been providing mortgage advice to home owners for many years.

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