Offset Mortgages

What is an Offset Mortgage?

An offset mortgage is a type of home loan that allows you to link your savings and current accounts to your mortgage. The balances in these accounts are used to offset the mortgage balance, reducing the amount of interest you pay.

How It Works:

  • Linking Accounts: Your savings and current accounts are linked to your mortgage.
  • Offsetting Balance: The total balance in these accounts is subtracted from your mortgage balance when calculating interest. For example, if you have a mortgage of £100,000 and £20,000 in savings, you only pay interest on £80,000.
  • Interest Calculation: Interest is calculated on the reduced mortgage balance, lowering your monthly payments or shortening your mortgage term.

Benefits:

  • Lower Interest Payments: By reducing the mortgage balance on which interest is calculated, you pay less interest overall.
  • Flexible Savings Access: You can still access your savings when needed, though withdrawing funds will increase the mortgage balance and interest payments.
  • Potential Tax Benefits: In some cases, the interest saved on the mortgage may be more beneficial than the interest earned on savings, which could be taxable.

Considerations:

  • No Interest on Savings: While your savings are linked to the mortgage, they typically do not earn interest.
  • Discipline Required: Effective use of an offset mortgage requires disciplined saving and spending habits to maximize benefits.
  • Complexity: Offset mortgages can be more complex than traditional mortgages, so it's important to understand how they work and whether they suit your financial situation.

Example:

  • Mortgage Balance: £150,000
  • Savings Balance: £30,000
  • Interest Calculation: Interest is calculated on £120,000 (£150,000 - £30,000)

By using an offset mortgage, you can reduce your interest payments and potentially pay off your mortgage faster.