Are Offset Mortgages A Good Idea?

Are offset mortgages a good idea? There are some scenarios where the answer is yes.

  • An offset mortgages is not for everyone, it is aimed at people who have a large amount of money in the bank.
  • An offset mortgage is an alternative to overpaying on your mortgage. With the offset mortgage you still have access to those funds should you need them for an emergency.
  • The amount you save reduces the amount of mortgage interest.
  • It is advantageous for parents looking to help their children onto the property ladder further down the line.
  • Your savings and current bank account balances are linked together therefore reducing the overall balance of your loan.
  • With mortgage rates at record lows it lessens the case for paying off your mortgage and holding onto your savings instead.
  • Savings interest rates and offset product rates are narrowing making an offset mortgage more appealing for a wider audience than previously.

How An Offset Mortgage Works in Your Favour

Offset mortgages are suited to people who don’t mind NOT earning interest on their savings as the amount you save is deducted from your mortgage interest rate amount instead. The interest you end up paying each month is then calculated on that reduced interest rate figure.

How Parents Can Help Their Children Get Onto The Property Ladder With An Offset Mortgage

Offset mortgages can be great for parents helping children get on the property ladder without the need to act as a guarantor or simply give them the money. While it is currently very difficult for younger people to get onto the property ladder this is a great way to give them a helping hand.

An offset mortgage is particularly suited to people who have substantial savings or who receive large bonus payments. If you are such a position that you are able to obtain a large amount of money in a short amount of time (such as for example if you are self employed and save throughout the year to pay your tax bill) then an offset mortgage could be the right type of mortgage for you.

The Advantages of an Offset Mortgage

Forerunners to the offset mortgage combined your savings and mortgage into just one account and it became clear over time that people did not prefer this and like the idea of being able to see the different balances in different accounts. By having your savings in a different account to your mortgage this still gives you peace of mind knowing that you can still access those funds if required for an emergency.

With the dire interest rates for savings accounts these days it makes sense to put your money to work for you as smartly as possible. An offset mortgage is a great way to do this. You may already have a clear idea of how an offset mortgage would work in your particular circumstances but here is an illustration for comparison:

A client borrows £120,000 and has £20,000 in a current account and savings accounts linked to the mortgage.

Mortgage interest is charged on £100,000 instead of the £120,000.

This means that the interest part of your mortgage repayment is less therefore saving you money each month with the added advantage that you can still access your funds if you need to.

How An Offset Mortgage Affects Your Mortgage Month On Month

You have the option of making the offset product work in your favour, in particular:

  • Lower interest payment mean lower monthly payments. This does not affect your mortgage term, but it does reduce your monthly payments.

or

  • You can reduce the term itself. You can choose to keep your monthly payments the same and you will actually shorten the term of your mortgage by overpaying!

The Disadvantages of an Offset Mortgage

The disadvantages of an offset mortgage are:

  • These type of mortgages tend to have higher rates on them
  • While your savings are working toward reducing the interest part of your mortgage, if you withdraw some of the savings you lose out on the effective amount hitting the mortgage.

It is worth noting that the difference between the rates of the better offset market products when compared against standard mortgages have been becoming narrower which is good news as offsetting is now become suitable for more people.

Offset Mortgages and Tax Liabilities

Higher-rate tax payers may also want to consider offset mortgages as their savings will attract no interest and they will not have to declare this as taxable income. In other words because you are effectively putting interest earned  from savings or from a lump sum of money earned towards your mortgage it is tax-free.

For basic-rate taxpayers the threshold for tax liability is set at £1,000. However, additional-rate taxpayers have no personal savings allowance, and higher-rate taxpayers have only £500, which could be outstripped relatively quickly if you have a larger sum of savings.

An offset mortgage account allows savers to “earn” this interest tax-free.

Can You Save By Switching To An Offset Mortgage?

You also should factor in your potential savings rates. Obviously you want the interest and tax (see below) you save on your mortgage, to be greater than the amount of interest you could have earned if you simply kept your money in a savings account. This narrowing of rates is now making it more appealing to link your savings to  your mortgage than to keep it as savings alone.

An example of this could be:

Basic Rate Taxpayer

A two-year offset rate of 2.89%, a basic rate taxpayer would need to earn 3.67% or more on a standard savings account in order to generate an equivalent return to the benefit offsetting would have.

Additional Rate Taxpayers

If you are in the 40% taxpayer band you would need a savings account paying 4.92% or more. On the other hand if you are in the 50% rate band you would need to be earning at least 5.94%.

Of course, this is easier said than done but the principle is there.

 

People Also Ask:

Can you still get offset mortgages?

Yes you can still get offset mortgages. The interest rate between an offset mortgage and a saving account is closing which now makes these a much better viable option to make your money work toward paying your mortgage off early. There are a growing number of lenders who now offer offset products.

Do Offset mortgages work?

Yes they do work. As explained in the article above they work by linking your savings and current bank accounts to your mortgage. Rather than earn money from your interest it is “offset” against the interest on your mortgage instead therefore reducing the amount you pay toward the mortgage. This has the advantage of either reducing your monthly payments or alternatively by keeping your payments the same you can reduce the term instead.

Can you overpay on an offset mortgage?

You do not overpay as such. Your mortgage is linked to your savings and current account and therefore it is up to you how much you put in. The more money you have in savings then the more you can offset against the mortgage interest so it is not correct to say that you can overpay but instead to think that your money is not tied up and you can pay as much or as little into the existing balance as  you like.

Is it better to pay off mortgage or save money?

You should pay off the debts that hurt you in the first instance. Once you have done this then (as always) make your money work for you, one way to do this is to take advantage of the closing gap between the rate of interest you would normally receive on your savings and the rate of interest on an offset mortgage product and go for the better product. If your savings do not pay you as much as you would earn by linking that to your mortgage (and also by the amount of tax you save because the interest can go toward your mortgage and not classed as normal income) then it makes sense to reduce your mortgage. Once your mortgage is paid off then you can keep that monthly payment and put it toward more of life’s luxuries instead.

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