What is an offset mortgage?
An offset mortgage is a type of product that lets you link your mortgage to your savings. The balance of your savings is used to reduce the amount of interest charged on your mortgage. Your savings will be “offset” against the value of your mortgage and you’ll only pay interest on your mortgage balance minus your savings balance. Your savings don’t repay any of your mortgage, they just sit alongside it and saves you interest. You can also link an offset mortgage to your current account.
How does it work?
*It works something like this:
You have a mortgage of £100,000. You’re paying an interest rate of 3.00%.
You also have £10,000 in a savings account. By offsetting your £10,000 savings, you only pay interest on £90,000 of your mortgage.
Over the course of the year this can save you up to £300, but this is dependent on the interest rate on your savings account.
Interest rate dependent. This is correct of 12/06/2017
With an offset mortgage, you can choose how to benefit from the interest you save:
Once your savings or current account are offset against your mortgage, you can still add to them – this is good as more money offset means more interest saved.
Is an offset mortgage a good idea?
Offset Mortgages are a popular option for higher rate taxpayers in particular. This is because you don’t earn interest on your savings, therefore you won’t be paying out for tax.
With an offset mortgage, you usually still have access to your money whenever you need it, your savings aren’t locked away, but you have to be wary of the fact that your mortgage payment may increase if you make a withdrawal.
Is an offset mortgage a bad idea?
Although the deals can look tempting, the rates charged are can potentially be higher than those on a ‘traditional’ mortgage.
Again, you must remember that when you offset your savings against a mortgage, there will be no interest made on the money.
Ultimately, it is important to compare a wide range of different mortgages and rates. Don’t forget to factor all the other fees that come with a mortgage! If you’re unsure, it might be beneficial to speak to a mortgage broker who can help you find the best deal.
Here at Active Brokers, we actively search for the best deal for you and make sure that you feel confident in your mortgage. We can help you to prepare for a mortgage application 12 to 24 months before you choose to buy a home. To book a free strategy call, click here.