An offset mortgage gives you the ultimate in flexibility with your mortgage, but what are it’s benefits, who should consider using this type of arrangement, what are the risks involved?
Offset mortgage benefits
- Cash flow – also have cash available instantly. Pay funds towards your mortgage debt yet be able to call on them when you need them
- Flexibility – pay more when you can, less when you need to, pay lump sums, draw back lump sums
- Savings – make massive savings on interest costs over the term of your mortgage
- Protection – protect your lifestyle against the unexpected by keeping cash to hand
Offset mortgage – risks
- You need to be disciplined in managing your mortgage or you may find yourself with a debt you struggle to repay at a later date
An offset mortgage means you can
- Repay your mortgage in a way that works for you
- Benefit from a massive reduction in mortgage interest costs due to the effect of offsetting
Using your savings to offset rather than putting them in a savings account
Today inflation is running a 2.2% (RPI). Can you even best inflation with your savings in a deposit account?
Holding your money in an online savings account may pay you just 1.01% interest (example Post Office)
As a higher rate tax payer your net return is just 0.66% after tax.
Holding £50,000 in the Post Office therefore costs you £800 a year after the effect of inflation.
The same £50,000 offset against a typical offset mortgage balance saves you £1,000 in interest with no tax to pay.
- No need to move your savings regularly to maintain a competitive
- No need to worry about introductory offers
- No need to worry about 90 day notice periods
- No need to use up your ISA limit
How an offset mortgage works
With a standard mortgage you borrow money and pay interest on the full amount outstanding. When you pay funds into your mortgage, you cannot take them back again without making a formal application to the Lender.
With an offset mortgage you put your savings into your mortgage account.
Those savings are then offset daily against your mortgage balance before interest is applied.
You can withdraw your savings at any time with no limit. This allows you to massively reduce your mortgage interest when it suits and have access to cash when you need it. You pay off your mortgage in less time, whilst keeping control of your money.
Who should consider an offset mortgage
Ideal offset mortgage clients include those with..
- Fluctuating income
- Seasonal income
- Large bonuses
- Commission work
- Self employment
or those who simply want to use an offset mortgage to take years off of their mortgage term and save thousands of pounds in interest.
Offset mortgage myths
- Too expensive – no longer, offset mortgage rates in today’s market are highly competitive
- Need a big cash pot to make it worthwhile – no true, every penny in your offset account makes a difference
- Too complicated – offset accounts are simple to understand and you can manage yours online
- It is a self employed product – employed clients find offsetting just as valuable as the self employed
Offsetting and interest only mortgages
Most mortgages on main residences are set up today on a capital repayment basis meaning that every month you pay interest on your mortgage and clear a lattice capital. In this way your account is set up to clear totally over a prescribed period (for example 25 years)
With an Interest only mortgage your commitment is simply to cover your interest payments monthly repaying the capital through other means such as:
- Other investments
- Other property
- Pension funds
- Sale of property
Unlike the situation in the past, the Regulator has recently taken great interest in the basis on which Lenders offer interest only mortgages. Rules on paying back capital through equity investments are now so tight as to be impractical.
Repaying your capital through sale of your home and downsizing is a option that mainstream lenders consider perfectly viable in certain circumstances.
- Make your savings work harder
Still not sure? watch our video.