How offset mortgages work...and how they can save you thousands of pounds..
You tend not to hear much about offset mortgages anymore. They had a spell of being exceptionally popular but have seemingly drifted into the background a bit - especially with Covid.
My theory on this is that lenders aren't that keen to offer Offset Mortgages - why? because smart customers with the right profile can really make them work and save a fortune over the term of the mortgage...and that obviously isn't great for the lender.
So in this article I wanted to explain how offset mortgages work and illustrate some examples for you. To explain offset in its simplest terms, any savings you hold are 'offset' against your mortgage balance
So if you are in a job where yourself, your partner, or if you are lucky you have combined savings, bonus payments that you put in the bank - then you can effectively use this to offset against your mortgage balance. You don't get any interest on your savings....but you don't pay any interest on the corresponding mortgage balance either.
You can utilise this in two ways;
1) Decrease the term of the mortgage ....keep paying the same monthly payment despite interest being reduced by your savings - therefore paying the balance off more quickly
2) Decrease your payments by holding savings and reducing the interest cost, and therefore the payment amount.
Some of you might already be thinking....why not just pay a chunk off the mortgage? Well the beauty of offset is that all the while cash sits in the savings account you save money on your mortgage BUT crucially those savings are instant access. If you need the money you have it readily available....it isn't readily available if you have physically paid it off the mortgage!
For this reason City based clients tend to like this format. Save money on the mortgage when not using the cash...but for example if a good investment comes up they can deploy cash immediately. It is a very flexible system.
Worked examples
This example from Scottish Widows shows how a mortgage term can be reduced...however it should be noted that the example uses a rate of 3.49% which is significantly higher than the current offset rates they offer!
So as you can see you can lop a fair bit off of a mortgage even with relatively modest saving levels.
The following example from Scottish Widows shows how you can reduce payments instead of reducing your term.
Again, as you can see on a modest sized mortgage with modest savings levels there are good savings to be made on payments.
SO WHO DO OFFSET MORTGAGES REALLY WORK FOR?
Lets be honest, at the sorts of levels shown above the savings are nice but don't make a huge difference. Where offset really works is when you get that big bonus and it is going to sit in your account, or where you have strong savings levels and can offset a large part of your mortgage. That's when you can really make a big gain and make your mortgage highly cost effective compared to a standard product.
That's why offset can be especially beneficial for higher net worth and City clients
Lets look at a client with a ￡500,000 mortgage and cash in offset of ￡150,000
This is much more meaningful! A full five years can be cut from your mortgage term (20%) or alternatively you could save a whopping almost ￡50,000 over the term.
To find out more about this or any other aspect of mortgages - just get in touch.
My contact details are all in my profile header!