Offset mortgages

Offset mortgages became popular in the UK in the late nineties.  Interest rates for offset mortgages tended to be less competitive than traditional mortgages (and still are in the main) which didn’t help to boost public opinion of them.  However, recently offset mortgages have increased in popularity due to their being cited as a means of paying off the mortgage quickly.

The idea is that you use your savings to reduce the amount owed on your mortgage.  For example, your mortgage is £100,000, you have savings of £25,000 so you only pay interest on the difference of £75,000.  You avoid paying tax on the interest that your savings would have earned in a savings account, plus lenders calculate interest daily on offset mortgages.   

With offset mortgages, you make a monthly payment into your mortgage as usual but your savings work as an overpayment.  So if your savings increase, the interest payable on your mortgage decreases.  In order to reduce your mortgage payments, you can therefore put lump sums into your savings/current account.  Typically, offset mortgages do not penalise the borrower for repaying the mortgage early. 

Types of offset mortgages

You can have either an offset mortgage that uses only your savings, or one which also utilises your current account, otherwise known as current account mortgages (CAMs).  With current account mortgages, you get the same facilities as a traditional bank account but you view your mortgage and bank account as one statement.  One of the current account mortgages benefits is that you can add other savings in towards reducing the debt balance and thus the interest payable, plus you can transfer debts such as credit cards and personal loans across.  In this way, you benefit from paying the same interest rate for all your financial commitments, as well as keeping things more manageable in one easily viewed statement.

There is also a type of loan called a family offset mortgage, which can be a useful means of parents helping children onto the property ladder.  The buyer takes out an offset mortgage and the parent puts their savings into the same building society or bank.  The difference between the savings and the balance on the mortgage is the amount that the buyer is charged interest on. 

Who are offset mortgages suitable for?

Whether offset mortgages only work for those with large savings is a point that is often debated, but most experts agree that it is the case.  Offset mortgages do tend to offer less competitive rates than standard mortgages so they appear unenomical at first glance, but those in favour of offsets argue that they offer good value over the long term.  Regardless of interest rates and savings amounts however, the point is that offset mortgages need to be utilised with discipline.  Without money routinely going in to the offset mortgage, there will be little benefit.  You would be better off going for a cheaper interest rate for a standard mortgage. 

So how do I know whether to choose an offset mortgage?

It’s best to consult with an expert mortgage broker to determine whether an offset mortgage could work for you.  It’s not only a case of looking at your savings, but your lifestyle and future commitments – ie will you be able to discipline yourself to get the best out of your mortgage? 

For free expert advice about offset mortgages, contact us

See also:

Current account mortgages
flexible mortgages
types of mortgages available