Finding the right mortgage to meet for your personal financial needs and goals can be tricky with so many different mortgage deals to choose from. Offset mortgages are unique in that they can reduce the amount of interest you pay on your mortgage and may even help you to pay your mortgage off early. In this article, we explain how an offset mortgage works and when it may be a good idea to explore this type of mortgage.
What is an offset mortgage?
An offset mortgage is one where the interest charged on your mortgage balance can be offset against the value of savings that you hold in an account alongside it. With an offset mortgage, the interest that you pay on your mortgage balance is calculated by reducing the mortgage balance by the amount you hold in savings and applying the interest rate to the remainder of the mortgage balance - in other words, you only pay interest on the amount of your mortgage balance over and above the amount of your savings balance.
How does an offset mortgage work?
Offset mortgages are designed to reduce the amount of interest that you pay on your mortgage if you have savings. What this means is that you can pay less interest on your mortgage and in times when the interest rates paid on savings are low, this can be particularly attractive.
In other words, the effect is the same as if your were to overpay a loan but with the added benefit that you don’t actually give any money away, so still have access to it.
As with other types of mortgages, an offset mortgage can be arranged with a fixed, variable or tracker interest rate.
Given the often huge disparity between savings interest rates and mortgage rates, your savings are effectively earning a rate of interest equal to that which is applied to your mortgage i.e. higher than is normally available to savers!
Are offset mortgages a good idea?
If you are a mortgage borrower with savings you may want to consider taking out an offset mortgage. Like any financial decision, you have to weigh up the advantages and disadvantages of choosing an offset mortgage compared with a standard mortgage. Mortgage deals are offered based on your financial circumstances and the rates will vary depending on the lender you choose and how much money you wish to borrow. It is worth remembering that better mortgage rates are usually available to those with a larger deposit, making the loan to value ratio more attractive to a lender and this may also determine whether you are better off using your savings towards your deposit instead of sitting them in a savings account to offset your mortgage interest.
Pros and Cons of an offset mortgage
- Save on the interest on your mortgage balance (as long as the interest rate on the savings is lower than it)
- Maintain access to savings
- Pay off your mortgage earlier
- You may miss out on better returns if your savings were invested
- The rates available for an offset mortgage may not be as attractive
- Paying off part of your mortgage using your savings instead may offer you a better mortgage deal
How to decide if an offset mortgage is for you
It can be difficult to decide which type of mortgage is best for you, especially as this is a long term financial commitment. You may wonder whether building a savings reserve to offset the interest on your mortgage is the best use of your capital - could you earn a greater return by investing this, perhaps? This needs to be considered carefully and it is often best to engage the help of an independent mortgage adviser who can source the best mortgage deals based on your income, loan to value ratio and other financial goals.
Habito* is an online mortgage broker that gives mortgage customers access to a wide range of mortgage deals quickly and easily. The experts at Habito can help guide you through the various options until you find one that you are happy with. There is no charge for Habito's services as they are paid directly by the mortgage lender for placing your business.
You can also use VouchedFor* to find a reputable mortgage adviser in your area who will search the mortgage market before presenting you with mortgage deals based on your personal circumstances. As a Money to the Masses reader, Vouched For will review your mortgage free of charge and the mortgage brokers are all 5 star rated.