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What are offset mortgages?

Have you ever seen the term offset mortgages and wondered what it means? Do you have savings but don’t want to use them to reduce your mortgage in case you need access to them. Offset mortgages can allow you to save money on your mortgage or reduce your mortgage term. The linked savings are offset against your current mortgage balance effectively reducing the amount that interest is charged on. This can either be used to reduce your monthly mortgage payment or you can keep your payment the same and use the savings to shorten the mortgage term.  

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How do offset mortgages work?

In some respects, offset mortgages work in much the same way as other standard mortgages. You borrow a loan against a property and make monthly payments of capital and interest, or interest only. With an offset mortgage, you have savings in a linked account which are offset against your mortgage. The higher those savings are, the less interest you’ll be charged on the mortgage. This differs to other mortgages where savings can be used as a capital overpayment. With a capital repayment, once you’ve made that payment you can’t take it back. An offset mortgage offers more flexibility as your savings work in a similar way to credit. If you need to withdraw some of your savings you can, but the amount drawn is no longer offset against your mortgage and so you’ll be charged more interest. 

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Who are offset mortgages good for?

Offset mortgages are good if you have savings available that you’d like to use towards reducing your mortgage whilst retaining access to them. They are also good for self-employed borrowers with fluctuating income or those who receive large amounts of bonus / commission. There are also tax benefits as borrowers won’t be earning interest on their savings. With an offset mortgage, you won’t have to pay tax on your savings interest because you won’t earn any. This can make this type of arrangement appealing for contractors and high earners.
 

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What types of offset mortgages are available?

Fixed-Rate Offset Mortgage – With this type of offset mortgage you pay a fixed rate of interest on your mortgage balance for a set term usually between 2-5 years. With a fixed rate, the rate of interest stays the same for the set term. Your monthly payments can be just interest, or interest and capital.  
 
Tracker Offset Mortgage – As their name suggests, after your savings are offset against your mortgage, you are charged a variable rate of interest. This normally tracks the Bank of England base rate for a set term. As the rate is variable your monthly payments can go both up and down. 
 
Discounted Offset Mortgage – Similar to a tracker offset mortgage, with a discounted rate you get a discount on the lender’s Standard Variable Rate (SVR). This rate can also go up and down depending on what the lender decides. 
 
Interest Only Offset Mortgage – This is similar to a standard interest only mortgage in that your monthly payments only include interest – you won’t be repaying the capital. At the end of your mortgage term, you will need to settle the final mortgage balance. 
 

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What is a Family Saver Offset Mortgage?

A family offset mortgage is an account that allows you to link multiple family savings accounts to a mortgage. It’s most commonly used where parents and grandparents want to assist their children onto the property ladder. The borrower applies the mortgage to buy a property and family members deposit their savings into a linked account. This then reduces the amount that interest is charged on and the amount that is saved can either be used to reduce the payments or the term. Crucially, the savings in the linked accounts still belong to the family members who can withdraw them when they wish. 

Are offset mortgages more expensive?

Offset mortgage rates can be more expensive when compared to other types of mortgage. This means they are only usually suitable for those who have access to cash savings, and need the flexibility to take that cash back if they need it. As the savings linked to the account are offset against the mortgage balance, this reduces the interest charged. So whilst the rates are higher, the amount the lender charges interest on is smaller, meaning that the more savings you have, the more you can save on your mortgage. 

Offset Mortgages Pros and Cons

Offset mortgages come with a number of benefits, but as with most things there are some downsides too. 
 

Pros 

  • Greater monthly savings. You can choose to use your savings to offset the interest to reduce your monthly payments or mortgage term. 
  • Flexibility. No tying up all your savings. Easily access your cash when you need it. 
    Get on the property ladder sooner. If choosing a family saver offset mortgage, you might be able to get on the property ladder sooner. Family savings can help to lower your mortgage payments making a mortgage more affordable for you. 
  • Can be more tax-efficient. If you are a higher tax payer and pay tax on your interest, an offset mortgage can be more tax-efficient. If you aren’t earning interest on your savings you won’t have to pay tax on them. 
  • Better bottom line. When savings rates are low, offsetting can produce a better overall result as the mortgage rate is higher than you might get on a savings account. 

 

Cons 

  • Higher interest rates. Interest rates tend to be higher on offset mortgages compared to other types of mortgage.
  • Unless you have considerable savings in your linked account, it can work out more expensive. 
  • You won’t earn any interest on savings. This could mean you miss out on more lucrative interest rates elsewhere. This is especially true if interest rates are higher than mortgage rates. 
  • Might be better off making a capital repayment. You might find that you can access lower rates by using your savings to reduce your property’s loan to value. 
  • Linked savings account must usually be with the mortgage lender. You’ll need to move your savings to one of their accounts. The Financial Services Compensation Scheme only covers £85,000 per individual. If you have more than this in your linked savings account, you could put your savings at risk. Alternatively, you will have to place the savings elsewhere and not receive the offset benefit. 

Why choose Simple Fast Mortgage for your Offset Mortgage?

As with any mortgage, there are a range of lenders and deals on the market, and what’s available to you will depend on your individual circumstances. The most important factor is to find out if an offset mortgage is right for you. That’s why we would suggest working with the expert mortgage team at Simple Fast Mortgage. Our team has experience with arranging offset mortgages for customers so know which lenders are the best fit for you. We take full ownership for the mortgage process, liaising with the lender on your behalf to make your mortgage application go as smoothly as possible. Our friendly team can help you quickly secure the mortgage that’s right for you, contact us to start your mortgage application. 

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