Offset Mortgages Understood

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If you have some savings in the bank that’s not earning much interest, it might benefit you more to offset it against your current mortgage to reduce the interest you need to pay.

But what is an offset mortgage, and why should you consider doing it? In this post, Conveyancing Expert, your trusted company for residential conveyancing, shares more information on this topic that you’ll find helpful:

What Is an Offset Mortgage?

Simply put, an offset mortgage is one that is linked to a savings account. The balance on the savings account is used to minimize the interest charged against the mortgage to save you money. This is quite different from the typical mortgage, wherein the interest is set against the borrowed amount.

What the savings balance is for is not to repay the mortgage but to sit alongside it, serving as a provisional overpayment to lessen interests while at the same time allowing you to automatically tap into that account if needed.

How It Works in Practice

Assuming that your mortgage is £200,000 with an interest of 3%. If you have £30,000 in your savings account, you can offset it against the total mortgage amount, so you’ll only have to pay interest on £170,000 instead of £200,000. Originally, you’d have to pay interest of £6,000 per year, but if you offset, you’ll only pay £5,100, which means you get a £900 savings per annum.

If you left the savings in your bank account and it earns 2% interest, that would only amount to £600 per year, which is £300 less than what you “earn” from the mortgage. But if you choose to withdraw a certain amount of money from your linked savings account, know that the repayment will increase significantly.

What Are the Other Benefits of an Offset Mortgage?

Apart from the annual savings, offset mortgages also allow customers to either pay back the borrowed amount over a much shorter term or make lower payments monthly. This is because mortgage payments are based on the total loan amount instead of the offset amount, meaning borrowers are overpaying every month and reducing the length of time it will take them to pay off their mortgage.

Two Types of Offset Mortgages

Like conventional mortgages, offset mortgages are offered at either fixed or variable interest rates. It’s best to consult with a mortgage broker to determine the best option for you.

Are the Rates Higher with an Offset Mortgage?

Typically, rates for offset mortgages are somewhat higher than that for conventional ones by 0.2% to 0.5%. However, there has been a shift in recent years. Also, you should consider that some lenders charge a higher interest rate for those reducing monthly payments or paying back their mortgage faster.

Conclusion

Offset mortgages can offer value, especially for those higher rate taxpayers and people with significant savings who don’t need to rely on accrued interest for their daily expenses. That said, you should have enough savings on your account to cover between 20% and 25% of your total mortgage for an offset to be of value. If you are purchasing a house, you should consider speaking with a residential conveyancing expert who can help you understand all the costs associated with mortgages and related topics, including offset mortgages.

Conveyancing Expert offers quality conveyancing services in the United Kingdom. Contact us to get a no-obligation quote!

124 thoughts on “Offset Mortgages Understood”

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