How do offset mortgages work?
When taking out an offset mortgage your main bank account, or accounts, is combined with a mortgage account. This means that the more money you save, or the higher your regular income, the less interest you pay. Another advantage to offset mortgages is having accessible lending. Typically, the limit on the account will be the equity held in the property, and you can draw from the account up to the agreed limit. This will be established at the time when you set up your offset mortgage. For example, if you have an offset mortgage of £300,000 but have a linked savings account containing £20,000, you will only pay interest on the £280,000 liability balance.
Interest on offset mortgages
Depending on the lender, interest is likely to be calculated every day. This means that each day you have savings in your account, the more reductions you receive in the cost of your mortgage lending. An offset mortgage is also a tax-efficient option for homebuyers who may have been liable to pay tax on savings deposits since these are considered repayments against the overall balance rather than savings. Some offset mortgage lenders have the option to hold multiple accounts within the facility, which could include a current account, a savings account, and an ISA account, for example. To calculate the interest due, the balances on all the accounts are included. Most offset mortgages offer a degree of flexibility with options to make additional instalments, vary monthly repayment values, take repayment holidays when needed and adjust the capital repayment value as required.
The downside to offset mortgages
Whilst there are many benefits, it is essential to understand the downside of choosing an offset mortgage:
- Your capital repayments must be made in full. The interest is offset against your earnings and savings, but the capital element of the loan remains unchanged and repayments will be based on the original loan value.
- You will sacrifice earning interest on savings held in linked accounts. It is crucial to understand whether this will make you financially better or worse off, depending on the interest rates offered for your mortgage, and attracted against your savings.
Who are offset mortgages best suited to?
If you do not have much in the way of savings, an offset mortgage may not be your best option. Likewise, if you expect to need to draw from your savings, or regularly access your offset mortgage account for finances, the interest rates you pay may end up being higher than if you had selected a typical repayment mortgage. Whilst offset mortgages provide an easy way to access cash when you need it, they are not the cheapest way of financing borrowing.
Deciding whether an offset mortgage is right for you
Offset mortgages can charge higher interest rates or arrangement fees than some mortgage options, so it is important to compare and contrast the respective benefits from different mortgage offers before making a decision. If you are unsure which mortgage is best for you, and which is ideally suited to your circumstances, contact Revolution Finance Brokers today and we will be delighted to advise! Our network of reputable lenders, specialist mortgage financiers and niche products helps us to provide a bespoke mortgage brokerage service to every client.
Are offset mortgages a tax-efficient option?
If you are a higher-rate tax payer, then yes an offset mortgage can reduce your tax liability. This is because you do not pay tax on your savings income, and are not using any of your Personal Savings Allowance since you do not earn interest in savings when the account is rolled into your offset mortgage. The savings you make on reducing the interest payable on your offset mortgage counteract the loss of interest income on your savings.
What is a family offset mortgage?
A family offset mortgage is similar to a normal offset mortgage, and is most commonly used by parents who are helping their children purchase their first property. This means that the parent(s) can pay funds into a savings account that is included in the offset mortgage and thus reduces the interest payable on their child’s mortgage. This reduced regular outgoing mortgage repayment will have the added benefit of reducing the payments and making the affordability assessment a little easier to pass.
What are the advantages of an offset mortgage?
The key advantage is the reduced interest charges. This means that if you pay the same amount every month you will clear your mortgage faster. Alternatively, you could opt for a smaller monthly payment to reduce your outgoings. There are tax efficiencies for higher rate taxpayers, and most offset mortgage lenders offer the flexibility of making overpayments. It is important to watch out for early repayment charges though!
What are the disadvantages of an offset mortgage?
Things to look out for include the comparison of the interest rates charged. Although interest can be lower since savings are taken into account, the rates may be higher than you are comfortable with. You need to understand that your savings will not accumulate any interest income, so comparing the pros and cons is essential to work out which option will be most cost-effective for you. Offset mortgages are not a standard product, and are only available through specialist lenders who offer this type of facility.
How is a current account mortgage (CAM) different from an offset mortgage?
CAMs are a form of offset mortgage that are fairly unusual. Offset mortgages link your mortgage account to one or more current accounts and savings accounts. CAMs differ as they combine all of your debts and savings into one single account. This can include loan balance, credit card balances and your mortgage. The advantage to CAMs is that overall this can result in savings on the interest payable and help you repay your debt faster.