An Offset Mortgage is a loan that allows you to use your savings to cut down the mortgage costs. To facilitate the finances, you can club your savings account with your mortgage. The money in your account would be counted as an overpayment for the mortgage. However, this would just be a temporary arrangement and the savings would be accessible to you whenever you need it. Similar to standard mortgage, you can choose any of the fixed, tracker or discounted mortgages for offset mortgages.
Working of Offset mortgage:
In this kind of mortgage, you can deposit your savings with the lender. As the deposited money is considered as offset, you need to pay interest only on the balance amount. This reduces your burden of monthly payments.
For example, you are planning a mortgage of £100,000 and deposit your savings of £10,000 to the lender. Then, you have to pay interest on only £90,000. Now, suppose your mortgage APR is 5% then with the offset mortgage, you can easily save £500 of interest per year. This way, offset mortgages save a lot of your money.
Benefits of offset mortgage:
The biggest benefit of offset mortgages is that you can save up on the annual repayments value. As the amount for which the interest is charged is low, the interest payments are also low. Moreover, you can put your savings to good use and take it back in times of need.
With this, you can manage your finances well. Instead of maximising the savings, you can easily pay off the mortgage costs. You do not have to pay the tax on the money you have saved and that is a wonderful thing.
You can also use your savings to pay off the mortgage quickly but then you would be left with no savings. Offset mortgages offer you greater flexibility by allowing you to deposit the savings and take it back whenever required.
Drawbacks of offset mortgage:
One thing is that you can use your savings for a better investment and even earn interest over the amount, but when you opt for offset mortgage you deposit it to the lender and so, it ceases any rights over it. Another way to look at it is that investments can be riskier and so, you savings can also be at risk with a not so good investment. In that case, offset mortgages prove to be much safer bet for any individual.
One more thing to keep in mind is that the time taken to withdraw your savings would depend entirely on the lender. You may not enjoy instant access to your money just as you do with your savings account.
Which one to choose – savings account or offset mortgage?
This entirely depends on your circumstances. If you have kept your savings aside for buying something or for some important investment then there is no point depositing it as an offset. However, if you are just going to put cash in a normal savings account for no good then it’s better to use for offsetting so that you can pay lower rates of interest. Again, if your savings are too low for offsetting then it’s better to pay it normally without depositing the small amount of savings.
Do I need a huge amount of savings for an offset mortgage?
Well, there is no set amount and a relatively moderate savings can also be used for offsetting. Only thing is that your mortgage rate should be higher than your savings rate after tax. In fact, you can deposit the amount for a small period of one year or even less.
Do I get offset mortgages at rates lower than other kinds of mortgages?
No! Offset mortgages are offered at slightly higher rates of interest, mostly around the mid-market level. Do not expect the cheapest rates with the offsetting facility. Nonetheless, the offset mortgage rates change with your credit score and LTV.
How do I know which offset mortgage suits me the most?
Well, the best offset mortgage is that which you get at relatively lower rates of interest. There is no point in arranging a mortgage where you deposit your savings and then pay higher rates of interest on the balance. You need professional help to compare all offset mortgages and decide on the one which not just offers the lowest rates but is also more suitable for your circumstances.
When you want to compare offset mortgages offered by various providers, you can rely on our website freepricecompare.com. For resolving any dilemmas, queries or further consultation, you can easily take the help of our friendly team of mortgage experts by calling us on 08008807656.