Planning & protection
Mark Alexander
When it comes to buying a home, one of the biggest financial commitments you will make in your life, there are various options for financing your purchase. One such option is an offset mortgage.
An offset mortgage is a type of mortgage where the borrower’s savings and current accounts are linked to the mortgage. The balance of these accounts is then offset against the mortgage debt, reducing the amount of interest paid. For example, if you had a mortgage of £200,000 and savings of £50,000, you would only pay interest on £150,000.
The obvious advantage of an offset mortgage is that you can minimise the interest you pay.
As long as you have a decent amount in the savings account, you’ll be paying interest on a smaller figure.
Going for an offset mortgage means you may be able to put down a smaller deposit.
So, if you don’t want to tie up all your savings in property, you could still access them — though any money you take out of the account will no longer offset the loan amount.
There’s also a tax benefit. You won’t pay tax on the savings (because they don’t earn interest), which means they won’t be counted towards your Personal Savings Allowance. Although they won’t earn interest, they will be helping you save interest elsewhere.
Offset mortgages aren’t the guaranteed interest saver you may expect them to be. They do carry higher rates, which might mean you don’t end up saving much through the offsetting element.
By putting the cash into the property on the other hand, you will have a lower loan-to-value ratio, and this can help you access the better deals.
As mentioned, you won’t earn interest on the savings in your account, so it’s important that the amount of interest you’re saving outweighs the amount you could earn in a different account.
You’ll also need the linked savings account to be with the same provider, which can mean you need to switch accounts if you remortgage with a different lender.
There are fewer offset mortgages around, so your available deals may be limited. You may also have to pay high fees, which could counteract potential savings.
There are several reasons why an offset mortgage could be an option worth considering:
By offsetting your savings against your mortgage, you could potentially save thousands of pounds in interest payments over the life of your mortgage. This is because interest is only charged on the outstanding balance of your mortgage, so the more savings you have, the less interest you will pay.
Most offset mortgages offer flexibility in terms of making overpayments or underpayments. This means you can pay more than your required monthly mortgage payment when you have extra cash, or pay less when times are tough. This can be a useful feature for those with fluctuating incomes or who are self-employed.
Unlike with regular savings accounts, you don’t pay tax on the interest earned on your savings when they are offset against your mortgage. This is because the interest is not considered income, but rather a reduction in the interest charged on your mortgage.
There are a few main products to suit different borrowers. These are:
These mortgages are designed for those who want to help family members get on the property ladder.
For example, if it’s a parent, they would have a savings account linked to their child’s mortgage account, which could be used to bring down the mortgage interest.
Setting up this kind of arrangement can help first-time buyers get accepted by lenders.
Landlords can use buy-to-let offset mortgages to minimise their monthly payments and increase their profit margins.
Offset mortgages are generally designed for people with big savings that they won’t need to dip into for a number of years.
They work well for these situations:
Family members who want to help children or other family members get on the property ladder but do not want cash tied up in the property
People who want to access to cash, for example, for renovations
Higher rate taxpayers who want to avoid paying the 40 to 45 per cent tax rate on savings interest
Whether or not you should take one out will depend on how much flexibility you want for your cash and the amount the arrangement could save (or lose) for you.
That’s why it’s always important to do the sums on the interest.
Putting down a bigger amount as a deposit will help you access better deals. But keeping the cash in a linked account will mean you pay interest on a smaller amount.
You need to calculate the interest in both scenarios to decide which is most cost effective.
Generally speaking, you would need at least 20 to 25 per cent of the mortgage amount to remain in savings for an offset mortgage to be worthwhile.
But don’t just take our word for it — do the sums or speak to a mortgage broker.
An offset mortgage is a bit like overpaying. However, when you overpay, you will have to factor in the cost of early repayment fees (if you pay over the limit) and accept that you no longer have access to the cash.
With an offset mortgage, however, there is no limit as to how much you can keep in your linked account to offset the interest. But the downside is that you will usually pay higher interest and fees to have the mortgage.
There is a lot to consider when it comes to choosing the right mortgage for you.
As well as calculating all the sums, a mortgage adviser can help you decide whether it is more practical for you to keep access to your cash with an offset mortgage.
While it’s possible to set up an offset mortgage on your own, it can be a complicated process, especially if you’re not familiar with the mortgage market. That’s why it’s often a good idea to speak to a mortgage adviser who can help you find the right offset mortgage and guide you through the application process.
If you’ve decided an offset mortgage is right for you, here’s how to get started:
Arrange an appointment with a regulated mortgage adviser. As the number one rated wealth management firm on Trustpilot, you can rest assured you are in safe hands with Fairstone. Book a meeting with a Fairstone adviser today.
When you meet with your mortgage adviser, be prepared to discuss your needs and goals. This will help your adviser to understand your financial situation and recommend the right offset mortgage for you. You should also provide information on your income, expenses, and any other financial commitments you have.
Your mortgage adviser can help you compare different offset mortgage products and their features, such as interest rates, fees, and flexibility. They will also be able to explain the benefits and drawbacks of each product and how they suit your specific needs.
Once you have chosen an offset mortgage product, your mortgage adviser will help you with the application process. This will involve providing your personal and financial information, such as proof of income and identification.
Once your mortgage has been approved, your mortgage adviser will help you link your savings and current accounts to your mortgage. They will also help you transfer the funds you want to offset against your mortgage into your linked accounts.
Finally, your mortgage adviser will help you manage your linked accounts and make sure you are getting the maximum benefit from offsetting. They can advise you on how to maintain the benefit of offsetting and how to avoid dipping into your savings.
If you’re considering an offset mortgage, get in touch with an adviser today to guide you through the process and ensure you get the best deal for your specific needs.
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