In this bitesize episode, Craig Skelton Principal of CS Financial Group discusses Offset Mortgages: What they are, how they work and who they are for.
What is an Offset Mortgage?
Mortgage Brokers are often put off from recommending Offset Mortgages, as they’re deemed to be too complicated. However, they are great products for certain people. An Offset Mortgage links your savings account to your mortgage, so that the money you have in your savings account is offset against the loan.
To calculate how this works, take your outstanding mortgage balance, minus what you have in your savings. You only pay interest on this amount, not the original mortgage amount. If you have a substantial savings balance, you could therefore be saving thousands of pounds on your mortgage. This means that you could potentially afford to reduce your monthly payments or pay off your mortgage sooner, or even both.
Is there a better time than right now to look at an Offset Mortgage?
This year has seen a rise in Offset Mortgages compared to last year. With interest rates on savings at a record low, more and more people are putting their savings to good use.
How does an Offset Mortgage work?
An Offset Mortgage is linked to your savings, but, just to clarify, your savings will not earn interest when you offset the amount against your mortgage account, however, you won’t pay any interest on the equivalent amount of your mortgage.
For example; for a £125,000 mortgage with £25,000 in a linked savings account, you will pay interest only on the £100,000, as that is the total amount outstanding. Your savings are not used to pay any part of your mortgage off, so you have full access to your savings and you’re free to take out or add money as and when you wish, it just reduces the overall debt.
Which lenders offer Offset Mortgages?
Not all high street lenders offer Offset Mortgages, however, there are named banks and building societies that you know and trust offering them. The main lenders are Scottish Widows, Coventry Building Society and Clydesdale Bank, which is part of Virgin Money UK.
There are certainly other mortgage providers that offer Offset Mortgages, however, these are more niche, local banks or building societies. The best thing to do is speak to a Mortgage Broker to find out which lenders are offering the best Offset Mortgage products.
Is the process any different to a normal mortgage?
It’s exactly the same as a more traditional mortgage application, with the same affordability checks, lender criteria and the usual credit checks.
Who benefits from an Offset Mortgage?
If you have substantial savings, then an Offset Mortgage could benefit you. This could make Offset Mortgages beneficial to anyone who meets this criteria, however, it often applies to:
As Self-Employed people often save money each month for the next tax bill, their savings can be put to good use, rather than having their taxable savings in a normal savings account.
People with irregular incomes
Who tends to spend a budgeted amount each month, rather than what comes in. They can benefit from an Offset Mortgage, too, because generally speaking, they have money in their savings account due to their irregular income pattern.
Higher rate taxpayers
Pay more tax on the interest that their savings generate, so an Offset Mortgages is more tax efficient for them.
Offset Mortgages are less complicated than people think, so be careful not to dismiss it just because you don’t understand how it works. An Offset Mortgage is not for everyone, but if it is right for you, it could save thousands of pounds in interest and also reduce your mortgage term.
Speak to a Mortgage Adviser or Mortgage Broker, who will fully explain Offset Mortgages to you and help you to decide if it’s the right product for you.
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