An offset mortgage allows your savings to work much harder for you than if they were just sitting in an ordinary savings account.
An offset mortgage means borrowers only pay interest on their net loan amount – minus any savings they have in the same or linked account. Monthly mortgage repayments are calculated on the full debt, before offsetting is taken into account, so borrowers overpay their debt each month. Consequently, their mortgage debt is reduced much faster than with a conventional mortgage. Two examples are:
- A borrower with a £100,000 mortgage paying offset tracker loan rate of 5. 24% would save more than £39,000 interest over the life of the mortgage by offsetting £20,000 of savings. The borrower would also pay off the mortgage five years early, based on a 25-year mortgage.
- A borrower with a £150,000 mortgage would save more than £60,000 interest over the life of the mortgage by offsetting £25,000 of savings. If the borrower continues to make mortgage repayments based on the full loan, he would pay off the mortgage five years and three months early, based on a 25-year mortgage.
Savings and income can be drawn on as needed, or built up to cut future repayments, and borrowers do not pay tax on the interest earnt from their savings when it is offset against a mortgage.
According to one mortgage lender, one in four households would benefit from an offset mortgage. The Council of Mortgage Lenders said the number of offset borrowers jumped 50% last year to 170,000, which was worth £29. 3bn, and represented 7% of new lending. However, many households looking for a new mortgage do not realise they would be better off with an offset mortgage.
An offset mortgage tends to be the best option for borrowers with savings worth at least 8% – 10% of their mortgage if they are a higher rate taxpayer, for example, a higher rate taxpayer would need at least £10,000 in savings to offset against a £100,000 mortgage. A basic rate taxpayer would need at least £20,000 in savings to offset against a £100,000 mortgage. To match the savings made by offsetting, a higher-rate taxpayer would approximately need to earn 12% in a deposit account or 9% for a basic-rate taxpayer. An offset mortgage can also be suitable for people who are paid large bonuses or large amounts of commission on an irregular basis.
The Council of Mortgage Lenders said there are 250 offset products available. Three examples are:
- A cash Isa that can be set against the mortgage for tax-free savings
- Up to six current accounts can be used to offset against the mortgage – this allows family members to add their finances to the accounts, so it can be offset against the mortgage.
- Family offsets, which enable parents to help their children get on the property ladder. Parents can use their savings to be offset against the mortgage, which will bring down their children’s monthly repayments, and they still have access to their savings if they need it.
Offset loans are flexible. Without penalty, borrowers can pay off capital, make underpayments, and take payment holidays. Because an offset mortgage is flexible, the loans have a higher rate than traditional deals. However, the rates on an offset mortgage have fallen in recent years due to increased competition and many borrowers believe it is worth paying a premium rate because of the benefits gained with an offset mortgage.
An offset mortgage has grown in popularity for borrowers because offsetting is a great way to reduce the term of the mortgage, thus saving thousands of pounds on mortgage repayments, and still allowing access to savings for emergencies.
