Offset mortgages: the pros and cons
Offset mortgages allow homeowners to use savings they hold to help reduce the overall interest they pay on their mortgage, this can either help reduce the overall term of the mortgage or reduce monthly payments. Rather than earning interest on the savings, instead interest is only paid on the amount that’s left after the savings balance has been deducted from the mortgage balance.
Five reasons to choose an offset mortgage
1)????? You could save more on your interest than you would earn in a savings account
The savings from an offset mortgage can be considerable. Even though savings rates are currently more competitive than they’ve been for years, following a series of increases in the Bank of England base rate, many people taking out mortgages now will be charged higher rates of interest than they are earning on their savings. If, for example, someone has a ￡100,000 mortgage and ￡30,000 in a linked savings account, they would only pay interest on ￡70,000 rather than the full ￡100,000 loan.
2)????? There’s no tax to pay on your savings in the offset account
As you’re reducing debt rather than earning interest, you won’t have to pay any tax on savings interest. This can be particularly useful for higher and additional rate taxpayers who can earn a lower amount of interest on their savings before they must start paying tax, but also for basic rate taxpayers with substantial savings earning interest in excess of their ￡1,000 personal savings allowance.
3)????? They provide greater flexibility
Offset mortgages allow you to retain access to your savings, which you wouldn’t typically have if you used your savings to overpay your mortgage, or if you tied them up in a fixed rate account. This makes offset mortgages a particularly useful option for the self-employed, who can use cash set aside to cover their tax bills to reduce their mortgage interest in the interim.
4)????? They can enable you to repay your mortgage quicker or reduce your monthly outgoings
If you have an offset mortgage, you can usually choose whether to keep your monthly payments the same, and reduce the overall term of your mortgage, or to lower your monthly payments, helping to keep your outgoings to a minimum.
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5)????? They can help people get onto the property ladder
Family offset mortgages can be useful for parents to help first-time buyer children. They work by allowing a family member to put their savings into an account that’s linked to their child’s mortgage, therefore reducing their payments and helping with affordability.
Potential drawbacks of offset mortgages
Offset mortgage interest rates are potentially higher than standard mortgage rates due to the flexibility they provide, although this margin has narrowed in recent months.
Also since there won’t be any earned interest on the savings - this won’t be the right option for everyone.
If you or someone you know is considering an offset mortgage you can use our Offset mortgage calculator?to help your work out whether this type of mortgage is right for you.
L&C is not able to advise on tax or saving matters , and we recommend you seek professional tax advice for your individual circumstances. London & Country Mortgages Ltd, Unit 26 (2.06) Newark works 2 Foundry Lane BA2 3GZ is a company limited by shares. Our Companies House number is 1988608. We are also authorised and regulated by the Financial Conduct Authority. Our FCA number is 143002. The FCA does not regulate most Buy to Let mortgages.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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