Offset mortgages

Why an offset mortgage might be right for you

Offset mortgages combine a mortgage with a savings or bank account.  By doing this, it means borrowers save money on their mortgage repayments. According to the Independent, one in ten borrowers have an offset mortgage.

The difference between an offset mortgage and an ordinary mortgage

With an ordinary mortgage the lender works out the interest on the mortgage owed every month based on the total amount borrowed.  An offset mortgage takes into account savings you have in linked accounts. It deducts this amount of savings from the amount of your mortgage. This mean you pay less interest on your mortgage.

For example, if your mortgage was £200,000 and you had £30,000 in savings, you would only pay interest on £170,000 instead of £200,000. Depending on your savings rising or falling, your interest payments would do likewise.

The advantages of an offset mortgage

Your interest payments will be reduced if you have more savings.
You still have access to your savings
Additional and higher rate taxpayers pay no tax on their savings interest and the equivalent return is no different from the mortgage rate
Interest rates are usually competitive and comparable to traditional mortgage deals

How much can be saved with an offset mortgage?

The Independent gives an example of a borrower with a £100,000 mortgage and £7,500 savings

With a mortgage rate of 3%, linking £7,500 savings to this mortgage would result in £7,753 being saved on the total interest cost. It would also reduce the 25-year term of a mortgage by 16 months. If £200 was put into a linked account, then £17,159 would be saved in interest charges. It would shorten a 25-year mortgage by three years.


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