With interest rates on savings accounts remaining low, it may seem as though any savings that you’ve accrued are simply sitting there doing nothing. However this doesn’t have to be the case.
Offset mortgages are an interesting type of mortgage that you may not have heard of before. Essentially, these mortgages have a savings account linked to them, perfect if you’ve been fortunate enough to save some money over the past couple of years. The beauty of the Offset mortgage is that you only pay interest on the difference between the amount of capital in your savings account and your mortgage loan amount.
For this example we’ll use a mortgage of £100,00 and savings of £10,000. In this case, you’d only pay interest on £90,000, rather than the whole £100,000, thus reducing the overall amount of interest on your mortgage. Please note, you will not earn interest on your savings with an Offset Mortgage.
With this in mind, there a couple of ways that you can approach the way you use your offset mortgage. These are:
To reduce the term of your mortgage. In this case, you would be making the full mortgage payment and your offset benefit (the amount of interest offset between your savings and the mortgage balance), would be used to essentially make mortgage overpayments each month. This will gradually reduce the term of the mortgage and potentially save you money in the long run.
To reduce monthly mortgage repayments. In this case, your offset benefit (the amount of interest offset between your savings and the mortgage balance), will be used to reduce your monthly mortgage payment. If you have a repayment mortgage, the monthly repayment will always be based on reducing the amount of interest that you pay each month, ensuring that the equity in your home is still being reduced.
Offset mortgages may have a higher rate of interest than other products, so it’s important to discuss with your adviser if this would be advantageous in the long run or not.
There are a few things to keep in mind as you consider whether an Offset mortgage is the best option for you:
Do you want to keep the savings that you have accessible or would you rather use them to make a one off overpayment on your mortgage?
Although the savings account that is linked to your mortgage is accessible* you’re likely to get the best out of your offset mortgage if you keep a good balance in your offset savings account. Are you happy to keep your savings here and add to them when you can?
If you’d like to learn more about exploring an Offset Mortgage for your next mortgage then book an appointment with one of our advisers.
*subject to terms and conditions of your mortgage