Some providers will also allow you to link several savings accounts together– including family members who can offset against your mortgage, just speak to your provider.
How does an offset mortgage work?
If you had a £100,000 mortgage and £10,000 in savings offset against it, you would only pay interest on £90,000 of the mortgage.
Instead of paying, say, 3% interest on £100,000 (£3,000) in a year, you would pay 3% on £90,000 (£2,700) - a saving of £300.
A £10,000 savings account earning 1.5% would yield £150 in a year. So the net saving would be £300 off the mortgage less the £150 lost savings interest - leaving you £150 to the positive.
What are the benefits of an offset mortgage?
The interest that you will save with an offset mortgage almost always beats the interest you could earn on your savings. Any interest that you earn through a savings account (unless your savings are in an ISA) will attract at least 20% in tax (or higher for higher-rate tax payers) once you are over the initial £1,000 you can earn tax free. Even if your savings are offset against your mortgage, you can still add to your savings and potentially save even more in interest.
What happens if I overpay on my mortgage?
Some offset mortgages will allow you to overpay. But remember if you do overpay, as you have some spare cash, you are physically repaying part of your mortgage and you may lose access to this money unless you want to release equity – something to take into consideration if you need it in the future.
Another way to pay down the mortgage quicker is to keep the monthly repayments at the same level as you would paying off the full mortgage. For example, if you had a £200,000 mortgage and £20,000 savings offset against it, you would only pay interest on £180,000. However, your monthly repayments will be based on your full mortgage loan (£200,000) you would effectively be ‘overpaying.’
So your mortgage will be paid off early, you’ll be in profit quicker ,if you’re a buy-to-let landlord, or if you’re the homeowner then it means you’ll pay less overall in interest and own your own property outright that little bit faster.
Is an offset mortgage right for you?
Offset mortgages can be a great way to arrange your finances if you have savings that aren’t working well for you.
In real terms, simple savings are falling in value right now, thanks to the combined issues of inflation and low interest rates. So offset mortgages rates are winning legions of fans throughout the country.
If you’re a contractor or you’re self-employed and have substantial earnings, offset mortgages can be a great way to make the most of your money, while you save for a tax bill. Effectively, while you build up savings in preparation for an annual tax bill, it reduces the interest owed on your mortgage.
What do I need to watch out for?
If you already have your savings invested in ISAs or other accounts that are giving you good financial returns, then the sums become more complex. In that case, you should seek expert and tailored financial advice to decide whether an offset mortgage is right for you.
Most offset mortgages require a deposit of 25%, so bear that in mind, but in a lot of cases you can also link your current account, as well as your savings. So you can make significant inroads into your mortgage costs if you have a large amount of positive cash flow.
If you’re thinking of taking out a mortgage, take a look at our mortgage comparison tables and we can help you settle on a course of action that works for you.