Navigating the mortgage market can feel like crossing a minefield, but knowing your options can save you money in the long run. This guide will look at offset mortgages and how this type of mortgage uses your savings to help lower the amount of interest you’ll pay in long-term.
We’ll explain how offset mortgages work, their advantages and disadvantages, and give you pointers around what you need to know when deciding if an offset mortgage is right for you.
What is an offset mortgage?
Simply put, an offset mortgage is a product that allows borrowers to link their savings to their mortgage account. By doing so, you’ll only pay interest on the difference between the offset savings balance and the mortgage amount. The more savings you have, the less mortgage interest you’ll pay.
In a higher interest rate environment, many borrowers are experiencing an increase in their mortgage repayments, but not necessarily being rewarded on their savings. This type of mortgage product could be a good way to mitigate some of the financial impact.
Who Should Consider an Offset Mortgage?
Offset mortgages might ordinarily be considered the preserve of those with significant savings, or those who receive windfall income in one lump sum, like an inheritance. However, those with more modest savings, or even with no savings at all but a reasonable surplus of income monthly, will benefit. This type of mortgage lets you use that money to lower your mortgage interest without completely locking it away.
If you are okay with potentially getting less interest on your savings, but paying less interest on your mortgage, an offset mortgage could be a good choice.
Benefits for Homeowners
Naturally, the biggest benefit of an offset mortgage is that it offers you the chance to lower your mortgage interest payments. This can lead to substantial savings over your mortgage term, especially if you keep a good balance in your linked offset savings account.
Another attractive feature is the flexibility it gives you as you can still take out money from your linked savings. Whilst most mortgages allow limited overpayments, these additional funds paid into the mortgage are often difficult to get back out, requiring a remortgage or property sale to realise the money. This isn’t the case with an offset mortgage, where you have instant access to the funds within the linked savings account. This makes it a handy option if you want to have your savings ready for emergencies or other unexpected costs.
Comparing Offset Mortgages to Standard Mortgages
Understanding the difference between a standard mortgage and an offset mortgage is crucial for making an informed decision. The table below highlights some key distinctions:
|
Feature |
Standard Mortgage |
Offset Mortgage |
|
Interest Payments |
Interest calculated on the full outstanding mortgage balance |
Interest calculated on the outstanding mortgage balance minus the balance in the linked savings account |
|
Savings Interest |
Savings accounts earn interest separately |
Savings in the linked account don’t earn interest but are used to reduce mortgage interest |
|
Flexibility |
Limited flexibility for overpayments; early repayment charges may apply |
Usually allows for flexible overpayments and withdrawals from the linked savings account |
*Remember, this table presents a simplified view and the specific terms of both standard and offset mortgages can vary depending on the lender, criteria and specific mortgage product.
Preparing an Offset Mortgage Application
Preparing for an offset mortgage application is similar to applying for a standard mortgage The only additional complexity is in setting up the linked savings account, although this is typically dealt with by completing one additional form.
Like applying for a standard mortgage, you will need to gather important financial documents including proof of income, your job history and your credit history. Lenders will check if you qualify for their product based on their affordability and criteria eligibility. . Once lenders finish reviewing your application, they present you with a mortgage offer if they are happy to proceed. This offer will explain the terms and conditions of the loan once you are approved.
Offset Mortgage – Advantages for Borrowers
When you link your savings to your mortgage, you lower the amount of the mortgage where interest is applied. This means you will pay less interest over the life of your loan.
Another advantage is the flexibility it offers. You can often add or take out money from your linked savings account without any rules that may penalise you. This is helpful if you like to have easy access to your savings.
When the linked savings account is set up, you must choose to either lower your monthly mortgage payment, or make the contracted payment and shorten your mortgage term even further. This choice depends on your long-term financial goals and what you want to achieve, and you are able to change between the two as often as you wish. This ability to make changes can be very helpful, so you can adjust the mortgage to meet your needs.
Offset Mortgage – Drawbacks to Consider
While offset mortgages have many benefits, they are not suitable for all clients and have some important factors to consider. There are very few lenders who offer offset mortgage products, and a smaller market with few lenders means less competition, and therefore higher prices. The interest rate applied to an offset mortgage is also higher than a standard mortgage, so if you are not using the linked savings account you will be paying more interest than you could.
Although offset mortgages can help you save on income tax for interest earned from your savings, this benefit might not be as good as the earnings from a high-yield savings account. Take time to look at your financial situation closely. This will help you see if an offset mortgage fits your financial goals.
How an offset mortgage can save you money in the long run
Instead of your savings sitting in a bank account earning a low interest rate, they work harder when linked to a mortgage. They offset your balance, which reduces your interest costs, and over time this has a compounding effect.
Is an offset mortgage right for you? Here’s what to consider:
To know if an offset mortgage is right for you, think carefully about your personal situation, income, goals and how much risk you can take. Keep these things in mind:
- Savings and Spending Habits: Do you have a good amount saved? Will you keep a healthy balance while paying off your mortgage debt?
- Interest Rates: Look at the offset mortgage rates and compare them with standard mortgage rates. Think about how much interest you could earn on your savings if you didn’t choose an offset mortgage.
- Financial Goals: Do you want to lower your monthly mortgage payments or make your mortgage term shorter?
In conclusion, offset mortgages provide an innovative way for clients to save on mortgage interest costs. Whilst you can access your savings easily, it is important to understand both the benefits and the drawbacks. As there are multiple lenders in the market that offer offset mortgages, it’s vital you speak to an expert offset mortgage adviser to compare current rates and features available in the market.
Since 2017, LDN Finance has been successfully helping clients secure different types of mortgage products, ranging from standard residential to offset mortgages. To help decide what type of mortgage fits your financial goals, contact our expert advisers for personal advice on your available options.