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Offset mortgages

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Wouldn’t it be nice if you were only charged interested on portion of your mortgage? Offset mortgages give you the chance to do just that – and you don’t have to pay anything extra.

So, what’s the catch? Well, there isn’t really one. You need to have savings for starters, as this balance is what’s used to reduce the amount of debt you are charged for. It might seem complicated at first, but offset mortgages are actually a pretty good way to save on your home loan.

How offset mortgages work

An offset mortgage works by offsetting part of what you owe with a linked savings account. For example, let’s say you have a mortgage of £150,000, but you’ve also got £10,000 savings. You would only be charged interest on the difference – £140,000, not the money you’ve got in the savings account.

However, despite not being charged interest on the full £150,000, your monthly payments will be the same, allowing you to repay your mortgage more quickly.

What are the advantages?

One reason why offset mortgages are so popular is because they don’t incur any taxes. The interest on the money you use to put towards your mortgage will not be taxed at all – particularly beneficial to those who fall in the high taxpayer bracket.

However, it is worth noting that you won’t get paid any interest on the savings you use to offset your mortgage. With most savings accounts, you would be able to earn interest, but when it’s used for offsetting this isn’t the case.

In most cases, the interest you would have earned is a lot less than the interest you would have paid on the borrowing, so it can be a win-win situation.

What if you need to use your savings?

offset mortgagesYou may be a little reluctant to use your savings to offset your mortgage. After all, what if you need the money you have saved hard for?

Well, as you’re not technically repaying the mortgage with your savings you can still access it. If you originally had £10,000 in an account to offset your £150,000 mortgage, but spend £5,000 of it, you will then be charged interest on £145,000.

See how much you could save

By using your savings to offset your mortgage, you’ll end up paying less in the long run and repay it sooner. Who wants to be stuck paying their mortgage off for the next 30 years? Paying off your mortgage sooner ensures you get to enjoy your retirement as much as possible.

There is a difference between the interest rates for standard and offset mortgages – the latter usually being higher. However, with more competition on the market these days, this increase is often only very slight.

To ensure that you’re getting the best possible deal on your mortgage, it’s important to compare what’s available. Offset mortgages are definitely worth considering, so if you have substantial savings, it’s looking at how much you could benefit from this type of mortgage.

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One Response to “Offset mortgages”

  1. fas

    Very well written article which is a true reflection of am offset mortgage. I have had an offset for many years and have managed to reduce my monthly payments by £100’s. Most lenders now provide the option to either reduce your monthly payments or reduce your term and provide the flexibility to switch between the two.

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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