Offset mortgages haven’t been ‘fashionable’ for some time now, but recent reports in The Guardian and The Financial Times suggest that the product is making a very strong comeback.
In this article, BulbFin explains what an offset mortgage is and how to understand whether it’s right for you. If in doubt, feel free to get in touch with us today for friendly, expert and free financial advice.
What is an offset mortgage and why are they popular again?
According to The Guardian, offset mortgages are making a comeback thanks to the pandemic helping consumers’ save more money.
These lockdown savings are often left sitting in savings accounts. The problem is, interest rates are currently so low that any money in savings is not going to generate you much return at all.
Instead of leaving their savings idle, some savvy people are using the money to create an ‘offset mortgage’. This is where your savings are linked to your home loan.
Specifically, your savings balance is used to reduce (offset) the interest you will pay on your mortgage.
So if you have a £300,000 mortgage and you have £20,000 in your savings account, with an offset mortgage you would only pay interest on the difference between the two, or £280,000 in this case.
Make your savings work harder: is an offset mortgage right for you?
Many people elect to keep their savings easily accessible, rather than trying to put it to work in the stock market.
As mentioned above, the issue with savings sitting in your bank account is the fact that interest rates are very low right now, so your money isn’t going to be working very hard for you at all.
If you have money sat in savings it might be worth considering an offset mortgage to put your money to work.
By using an offset mortgage you might be able to knock years off your mortgage term and potentially save thousands of pounds in interest in the process.
Pros of an Offset Mortgage
- Creates reduced interest charges allowing you to keep paying the same each month and clear your mortgage quicker, or simply pay less each month.
- Your savings are still accessible for withdrawals
- If you’re a higher or additional-rate taxpayer, Offset mortgages can be tax-efficient
- Offset mortgages often allow overpayments, but charges for early repayments may apply.
What’s the Catch?
There’s no catch or trickery at play here but it is worth being aware of the potential downsides of an offset mortgage, these include:
1. Interest rates on offset mortgages can be higher than comparable standard repayment mortgages.
2. You normally won’t earn interest on any cash held in accounts linked to the mortgage.
3. Not many lenders offer offset mortgages, so your choice can be limited. Depending on the deals available, you may be better off using the savings you would have put into a linked account to pay down the mortgage itself.
Speak to an Expert
Wondering if an offset mortgage is right for you? Get in touch with BulbFin today to speak to an expert.