Reader's Question: Should I get an offset mortgage?
I keep seeing ads about offset mortgages - are they a good idea and should I be getting one?
Mr D Parker
My response:
Good question.
In simple terms, under an offset mortgage your savings can be offset (hence the name) against what you owe on your mortgage, to the same bank, so that interest is only charged on the balance.
What this means is that you can end up:
- Paying less interest on your mortgage.
- Saving income tax on your mortgage interest payments (as savings interest is taxed but the offset happens gross).
- Paying off your mortgage quicker.
So in principle they are a neat idea. As for whether you should get one will depend on your your personal circumstances, your current deal, your view on where interest rates are headed plus what offset deal you can secure. If you are unsure then you should speak to a mortgage adviser.
But in the meantime I’ve listed a few pros and cons of offset mortgages below:
Advantages of an offset mortgage
- Can help pay off your mortgage quicker.
- You pay less interest on your mortgage due to the offset.
- You can save income tax on your mortgage interest payments.
- They are flexible and often let you pay off lump sums without penalty which can be particularly useful for the self employed who often have less predictable earnings.
- Putting your cash into an offset facility means you can still withdraw it when you need it, which is often not the case if you were to simply overpay a standard mortgage.
Disadvantages of an offset mortgage
- They often have higher interest rates than comparable base rate trackers, fixed rate and other mortgages.
- Most offset mortgage are variable rate – which puts you at the mercy of interest rate rises
- You need a certain level of savings in the bank to make them worthwhile. Otherwise little will be gained from the offset and you will simply end up paying a higher rate of interest.
- They require discipline as not only will you have to regular switch providers to secure the most competitive rate out there but you will also need to keep an eye on whether you are in line to pay-off your mortgage by the date you planned to.
(picture: jscreationzs / FreeDigitalPhotos.net)
