OFFSET MORTGAGES: MAKING YOUR SAVINGS WORK HARDER
An offset mortgage links your savings to your mortgage so that your cash quietly cuts the interest you pay, while staying yours to spend. It is a specialist product these days, offered by a small number of lenders, but for the right person it can be one of the most useful mortgages going. Here is how it works, and the kind of situations where it earns its place.
HOW AN OFFSET MORTGAGE WORKS
Picture two linked pots. One is your mortgage. The other is a savings account the lender opens and links to it when your mortgage completes. You are only charged interest on the difference between the two.
Say you have a £200,000 mortgage and £50,000 in the linked account. Instead of charging interest on the full £200,000, the lender charges it on £150,000. The £50,000 is still yours, still sitting there, and you can take it out whenever you like. The more you keep in the account, the less interest you pay. Take money out and the benefit simply shrinks to match.
Offset is a residential product, for the home you live in rather than a buy to let.
HOW TO USE THE OFFSET BENEFIT
The interest you save is called the offset benefit, and you can usually choose how to put it to work, most often either to bring your monthly payments down or to clear the mortgage sooner. You are not tied to your first choice either, so you can switch as your circumstances change. Offset also comes on both repayment and interest-only mortgages, so it fits either way of borrowing.
A QUIET ADVANTAGE FOR SAVERS
Your linked savings do not earn interest, because they are busy offsetting your mortgage instead. The upside is that there is no income tax to pay on them, and they do not use up your Personal Savings Allowance the way money in an ordinary savings account would. For anyone whose savings interest would otherwise be taxed, that is a quiet but real advantage. How much it is worth comes down to your own tax position, which is a conversation for your accountant.
WHERE AN OFFSET EARNS IT KEEP
The product suits people who carry a decent cash balance but want to keep their hands on it. A few real situations show it best.
THE SELF-EMPLOYED RESERVE
Or say you are doing up the house and holding a lump sum for the work. You rarely need all of it at once. Keep it in the offset and it reduces your interest while it waits. When it is time to pay the joiner, settle the kitchen or cover the next stage, you take out only what you need, when you need it, and the rest carries on working against your mortgage until its turn comes.
THE RENOVATION POT
Or say you have a big project on, an extension, the garden, a major renovation. If you are holding a lump sum for the work, you rarely need all of it at once. Keep it in the offset and it reduces your interest while it waits. When it is time to pay the joiner, settle the kitchen or cover the next stage, you take out only what you need, when you need it, and the rest carries on working against your mortgage until its turn comes.
THE RAINY DAY POT
A rainy day fund works the same way. Most people are told to keep three to six months of outgoings set aside. In an offset, that same safety net trims your mortgage cost while it sits untouched, and it is still there in full the moment you need it.
The thread through all of these is the same. Your money stays within reach, but it stops sitting idle.
OFFSET OR JUST OVERPAY?
A fair question is why not simply overpay the mortgage with that cash instead. Both cut your interest. The difference is access. Once you overpay, the money is gone into the mortgage, and getting it back means asking the lender, with no guarantee of a yes. Offset the same money and it is still in your account, doing the same job, but yours to take back at any point. If there is any chance you will need the cash, that flexibility is the whole point.
WHEN AN OFFSET MORTGAGE IS NOT THE ANSWER
It is not for everyone. If the account sits empty you get no benefit at all, so it only makes sense if you will actually keep money in it. And if your savings are on the smaller side, a plain mortgage on a sharper rate may work out better, since offset deals can price a little above the cheapest standard products and the benefit has to earn that back. Whether your cash is better offsetting or sitting somewhere else is worth talking through before you decide.
TALK IT THROUGH
If you need independent mortgage advice, book a video call, give us a ring, or pop into our office in Dunblane or Glasgow for a chat over a coffee. We have been helping clients across Scotland and the UK with their mortgages since 2001, and we genuinely love what we do. Email us below or book a meeting via the link above.
Email us below or book a meeting via the link above.
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IMPORTANT INFORMATION
Your home may be repossessed if you do not keep up repayments on your mortgage. Mortgage Advice Brokerage is authorised and regulated by the Financial Conduct Authority (FCA: 479200). The information contained in this article is for guidance purposes only and does not constitute advice. Your individual circumstances will affect which mortgage products are available to you.
