This is my favourite mortgage product. An offset mortgage is a mortgage that has a savings account built into it, which saves you money on the interest that you pay. The mortgage is offset against your savings. This product used to be more commonplace but now, not many lenders provide it, and the ones that do generally require larger deposits. Many people don’t even realise that this type of mortgage exists as a product.
Financial Position
This mortgage product will not be suitable for everyone. But it’s a product to consider if you are in a position to.
As mentioned previously your savings, sit in a savings account that is linked to the mortgage. This savings account pays no interest. Below are illustrations for the offset mortgage.
Example: 1
Mortgage Balance: £100,000
Linked savings account: £30,000
Interest will be charged on £70,000 of the mortgage
Most offset mortgages allow you to withdraw money from the savings account linked to the mortgage.
Example: 2
Mortgage Balance: £100,000
Linked savings account: £30,000
Amount withdrawn from linked savings account £20,000
Interest will be charged on £90,000 of the mortgage
Most offset mortgages will also let you make overpayments on the outstanding mortgage balance. Which will reduce the principal and the amount of interest you need to pay.
Example: 3
Mortgage Term: 25 years
Mortgage amount: £100,000
Interest rate 3%
Monthly repayment £474.00
Linked savings account: £30,000
If you kept the monthly repayment at the £474.00 for the duration of the mortgage you could pay off what you owe in 20 years 08 months. Over this period the amount of interest you would save on the mortgage is £24,804. Your tax savings would be £4,445.You pay off the mortgage in 15 years and 5 months by applying the £30,000 from the linked savings account to the mortgage.
Example 4
In this illustration, we are paying an extra £200 per month into the saving account
Mortgage Term: 25 years
Mortgage amount: £100,000
Interest rate 3%
Monthly repayment £474.00
Linked savings account: £30,000
Monthly savings deposit £200.00 If you kept the monthly repayment at the £474.00 for the duration of the mortgage you could pay off what you owe in 19 years 07 months. Over this period the amount of interest you would save on the mortgage is £31,118. Your tax savings would be £3,826. You pay off the mortgage in 10 years and 1 month by applying the accumulated savings of £54,200 (The monthly savings in 10 years and 1 month is £24,200) to the mortgage.
The interest rate that you receive get on an offset mortgage is typically much higher than the interest rate you will get on a savings account. So, the savings you make on the mortgage is higher than the return you can receive from a typical savings account.
In addition, you don’t have to pay any tax on any money in the linked savings account. This is an additional benefit over a standard savings account.
CONCLUSION
Advantages
You can reduce the term of the mortgage
Lower monthly payment as you increase the savings element.
You can take money out of the linked savings account without having to re-mortgage
You don’t have to pay tax on the savings in the mortgage.
Disadvantages
Generally, you will need a larger deposit to get this mortgage
Generally, interest rates are higher
Generally, you will need significantly large savings to make it worthwhile.
NEXT STEP
Contact your mortgage company/broker to see what offset mortgages are available to you
Is this a product that could work for you?