What are Offset Mortgages?
An offset mortgage is a type of mortgage that has a linked savings account.
This savings account is offset against the mortgage balance, the interest is charged against the mortgage ‘net’ balance of the linked savings account. The savings made on interest can be used to repay the mortgage or lower the monthly payments.
How does this work in practice?
- The balance of the mortgage is £300,000
- Linked Savings Account has a balance of £100,000
- Interest is only being charged at £200,000 ‘net’ mortgage balance
Mortgage Interest Rate is 4%, interest payments at £300,000 is £1000 per month and £200,000 is £666.
The ‘interest saving’ for the £100,000 in savings account is £334, you can pay £666 or you can continue to pay £1000 and overpay your mortgage by £334 to reduce the mortgage-term.
How does the Savings Account work?
This varies from lender to lender, generally speaking the savings account operates like any other normal savings account. You can access the savings but the interest is calculated daily based on what is in the savings account as a mortgage interest savings reduction.
Advantages
- This is a more cost effective way of returning a higher investment on your savings. You’d generally earn more on the savings against your mortgage than the interest from a savings account
- These savings are not subject to tax, however interest in a savings or an investment would be liable for tax
- You can still have access to your savings
Disadvantages
- Interest rates can often be higher than regular mortgage rates
- You can now interest on your savings