How an offset mortgage can set off your savings
First published 20 April 2016 • Updated 23 January 2018
Is your income as unpredictable as the British weather? Savings interest rates getting you down? Are you wary of locking up your liquid assets in your home? Then you may be interested in a flexible way to borrow and save at the same time.
Is it a bird? Is it a savings account? Is it a mortgage? (We won’t lie to you: it’s a mortgage.) But if you like the idea of getting those different areas of your finances to work together more effectively, then an offset mortgage might be one way to do it.
The savings vs mortgage dilemma
Before we get into what an offset mortgage is, let’s look at why they exist. If you have a mortgage, but are also trying to save, then you find yourself in a bit of a catch-22. The interest charged on your mortgage will very likely be much higher than the interest you earn on your savings. This means that even if you have a lot of savings, you’ll be losing far more through mortgage interest than you can gain through savings interest.
One way to cut these losses, of course, is to reduce the size of your mortgage. If you put your savings into the deposit on your property, then your mortgage will smaller, meaning less interest to pay. Your loan-to-value ratio will also be lower, which usually means lower interest rates.
This is what people usually do to decrease their mortgage repayments – but it has a drawback. Money put into your deposit is locked away until you sell the property. If you still want a lot of accessible savings, this approach may not be best for you.
How an offset mortgage is different
An offset mortgage offers a third option. You keep your savings in an account that is linked to the mortgage, to reduce the amount of the loan on which you have to pay interest. For instance, if you have a £100,000 mortgage and £20,000 of savings, you are only charged interest on £80,000.
With this kind of mortgage, you offset your savings against the mortgage amount. By doing this, it means that your savings effectively ‘earn’ interest equivalent to the interest rate on the mortgage (by reducing your repayments). Because mortgage rates are generally much higher than savings rates, this can mean your savings are working harder for you than they would in an ordinary savings account.
Are there any other advantages?
Another big attraction of offset mortgages is their flexibility. Typically they allow you to:
- take payment holidays (i.e. stop repayments for a while)
- borrow more money at the same rate, without needing to reapply
- make unlimited overpayments
- pay off your loan faster (by making those overpayments) and so pay less overall
- (sometimes) link your savings to your children’s mortgage to reduce their interest repayments, while keeping the savings accessible to you.
What about drawbacks?
The flexibility of offset mortgages does come with a price. The interest rates offered are often considerably higher, which can cancel out much of the benefit of the benefit gained by offsetting your savings. Whether or not this kind of mortgage is right for you depends heavily on your overall circumstances. You should also remember to factor in the arrangement fees.
Who is most likely to benefit from an offset mortgage?
When weighing up the benefits of an offset mortgage, consider the following:
- Do you have a lot of savings?
- Is there a good reason for not putting much of these savings into your deposit?
- Are the best savings rates you can find still much lower than the best mortgage rates you can find?
- Does your income fluctuate sometimes (e.g. are you self-employed / freelance / a business owner / reliant on bonuses)?
- Might your parents be willing to offset their savings against your mortgage?
The more ‘Yes’ answers you can give to these questions, the more likely it is that an offset mortgage could be right for you.
Making your decision
Remember that even if you can tick all the questions above, this still doesn’t mean an offset mortgage is necessarily right for you. Financial advice is often useful when seeking a mortgage – but it’s never more essential than when considering an offset mortgage.
An offset mortgage is about getting the different parts of your finances – savings and borrowings – to work together for your benefit. As such, it requires you to take all your financial circumstances into account. This is something that a financial adviser or mortgage broker can do for you. They can assess how well your finances are currently fitting together, and then advise you on whether an offset mortgage could provide the final piece of the puzzle.
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