There are various types of mortgages available to meet individual needs, with one such option being the offset mortgage. Offset mortgages are a type of mortgage linked to your savings account, where the lender offsets the total balance of your linked account against the amount you owe on the mortgage each month, and then works out your mortgage interest on the lowered balance. You won’t earn interest on the current and savings accounts while they’re linked to the mortgage.
The advantage of this mortgage type is that it reduces the monthly payment. Savings offset the mortgage balance, so you only pay interest on the reduced amount. Larger savings mean lower interest payments on the mortgage.
Savings offset the mortgage balance, so you only pay interest on the reduced amount.
The pros and cons of offset mortgages
Pros
Reduced interest charges: The key advantage of offset mortgages is that they can significantly lower your interest payments. Because the mortgage is calculated against the net amount after offsetting your savings, you'll only pay interest on the reduced balance. This can lead to substantial savings if your savings are currently on a lower rate than your mortgage.
Efficient balance management: Certain mortgage lenders in the UK offer the convenience of a dedicated offset savings account directly linked to your mortgage. This simplifies the process as your savings balance automatically reduces the loan amount used to calculate your monthly interest payment.
Potential advantage for first-time buyers: Offset mortgages can offer some advantages for first-time buyers who have managed to accumulate some savings. By reducing the effective mortgage balance for interest calculations, offsetting can potentially lower monthly repayments, making the mortgage more manageable.
Offsetting with linked accounts (limited availability): It's important to note that some lenders may allow offsetting with a linked savings account belonging to a close family member, potentially improving affordability. This option isn't universally available however, your mortgage adviser can check whether a lender will offer this option. While offset savings can improve affordability, lenders primarily assess the borrower's own income and financial strength when approving a mortgage.
Cons
You aren't earning interest on your savings: While you benefit from reduced mortgage interest, the funds in the linked savings account typically won't earn interest. This trade-off should be considered when calculating the overall savings potential with an offset mortgage.
Potential for additional fees and higher interest rates: While not always the case, some lenders may offer offset mortgages with slightly higher interest rates compared to standard deals. Compared to standard mortgages, offset mortgages may also incur extra charges. These could include ongoing fees for managing the linked savings account or a one-time setup fee.
Alternative mortgage options: An alternative solution is to consider using your savings for a lump sum payment towards your mortgage principal. This reduces the loan amount, which can potentially qualify you for a lower interest rate due to a more favourable loan-to-value (LTV) ratio. Lower interest rates translate to less interest paid overall compared to an offset mortgage however, the impact on LTV also depends on any property value appreciation.
Consulting an experienced mortgage adviser is essential to getting a tailored mortgage deal that suits you and your financial circumstances. Contact our team to explore offset mortgage options and their potential advantages for you.
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