If you’re a homeowner repaying a mortgage and you’ve got a few thousand pounds in the bank, you could be missing out by reducing the amount of interest you’re paying.
An offset mortgage is a way to link your savings accounts with your mortgage balance, and your lender can work out how much interest you’ll have to pay based on this.
However, not a lot of people are aware of offset mortgages and if you’ve been looking at mortgage deals, you might not even have considered one. Don’t assume that they’re too complicated though –we’ll explain how they work.
Linked to savings
Offset mortgages are linked to a special savings account. Your mortgage lender will subtract the total value of your savings from your mortgage balance, and then you’ll only have to pay interest on the amount that’s left.
For example, say you currently owe £100,000 on your mortgage and you’ve got £10,000 in savings. You’d only have to pay interest on the remaining £90,000 meaning your mortgage payments could be lower. Alternatively, you could continue to pay the same in mortgage payments every month and clear your mortgage faster.
An offset mortgage could be suited to you if you’ve got a relatively large amount in savings and you’re looking to keep your mortgage payments low, although you’ll still have to pay off your total mortgage.
Offset mortgages may be particularly attractive to higher rate taxpayers. Any interest they earn on their savings would be taxed at 40% – and savings rates are low at the moment anyway. By contrast if they offset their savings against their mortgage they would earn no interest on them, so have no extra tax to pay. But they would in effect be “saving” the interest on the offset amount – and the interest rate on the mortgage could well be considerably higher than the savings rate anyway.
Current account mortgage
Offset mortgages aren’t the same as Current Account Mortgages (CAM) as your savings accounts are still kept separate from your mortgage. With a CAM, your mortgage is combined with your current account, so it’s like being £100,000 overdrawn. Any savings or money you put into your current account can help to reduce how much interest you’re paying though, in a similar way to an offset mortgage and you may even be able to add in other loan or credit card repayments.
Things to consider
You might want to consider an offset mortgage if you’re looking for a way to pay your mortgage off faster, although you’d be able to do this by overpaying on a standard mortgage. You’d also still be able to access your savings easily, and putting more money into your savings would mean you’d pay interest on even less of your mortgage.
However, if you’ve got a lump sum saved up, it might instead be worth seeing if you can overpay your mortgage and clear it faster. Any savings that your mortgage is offset against won’t be earning interest so if you’re paying off your mortgage in this way over a few years, your savings could be worth less in real-cash terms at the end. The only downside with this would be if you think that you may need access to those savings again quite quickly – as you might end up having to borrow the money back again.
You’ll also have to have a relatively sizeable amount of savings put aside for it to make a noticeable difference to your mortgage payments. If you’ve not got very much saved up, an offset mortgage might not be the cheapest option, so it could be worth looking for another deal on a lower APR.
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