Offset mortgages are becoming more popular thanks to the miserly savings rates currently on offer, but they definitely aren't for everyone. Let’s look at how they work.
Sections
What is an offset mortgage?
An offset mortgage allows you to pit combine your savings against your mortgage debt.
Instead of earning interest, your savings will instead reduce the amount of interest you pay on your mortgage. Both accounts have to be from the same provider though.
This means you’ll reduce your mortgage and pay less interest on it thanks to your savings. It’s also worth noting that you can access your savings at any time.
Here's a simple example of how it'd work: if you have an offset mortgage of £100,000 and £20,000 in the linked savings account, you would only pay interest on £80,000 of your debt.
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When is an offset mortgage a good idea?
Offsetting can be tax efficient when it comes to your savings.
Usually, you’ll pay Income Tax on any interest you earn on savings outside of your Personal Savings Allowance and ISA allowance.
But as you are offsetting your savings against your mortgage, you don’t earn interest so you won’t be shelling out money on tax. This makes offset mortgages a popular option for higher rate taxpayers in particular.
With an offset mortgage, you usually have access to your money whenever you need it, as your savings aren’t locked away for the duration.
You can also choose to reduce your monthly payments or pay off your mortgage sooner thanks to the amount of savings you have associated with your mortgage deal.
When is an offset mortgage a bad idea?
Although some offset deals might look tempting, the rates charged are usually higher than those on standard (fixed-rate or tracker) mortgages.
It’s also important to reiterate that, when you offset your savings against a mortgage, there will be no interest made on the money.
How to find the best deal
It’s important to compare a variety of different mortgages and rates, and remember to factor arrangement fees into the cost.
If you have more savings in the bank, an offset could be the best option for you.
But if you’re still not sure after you’ve had a shop around, it’s a good idea to speak to a mortgage broker who can help find the best deal for you.
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