How do offset mortgages work?
Did you know that having a balance in a saving or current account can be used to offset interest on your mortgage? We look at the pros and cons of offset mortgages and if they're right or wrong for you and your mortgage.
What is an offset mortgage?
Offset mortgages give you the ability to reduce the amount of interest you pay by 'offsetting' any savings you have against it.
Say you have a mortgage of Ј200,000 and you have Ј50,000 in savings, if you put the savings in an account linked to the mortgage account, then you will only pay interest on the Ј150,000 over and above the savings.
Should you consider an offset mortgage - pros v cons
You will discover that offset mortgages have a number of advantages, as they can be more flexible than traditional mortgages. This, unfortunately, doesn't mean that they don't have disadvantages as well which you'll need to consider before getting one. We look at the pros and cons of offset mortgages below:
You can reduce the amount of interest you pay on your mortgage through cutting the amount of money you are paying interest on by putting your savings alongside it.
Many offset mortgages have flexible payment options, such as taking a payment holiday, or making unlimited overpayments to reduce the outstanding mortgage.
Depending on the interest rate environment, you can get a better 'rate' on your savings than you might be able to get elsewhere, as you are not paying tax on the offset rate.
Interest is usually calculated daily, so you get an immediate benefit from any overpayment you make.
You can usually borrow more money at the same rate as your mortgage without the need to reapply for the loan.
You may be able to get a better deal on your savings elsewhere, so you should check the
rates available before you put the money against the mortgage.
You will have all of your money in the same institution, which makes some people uncomfortable.
You have to have a certain amount of savings to offset to make taking this type of mortgage worthwhile - how much depends on the interest rate and the amount you are borrowing.
Thanks to the extra flexibility in these mortgages, the rate you are paying can be higher than a different type of mortgage.
Using payment holidays does not stop you having to make the interest payments, they are just delayed. This can cause problems if you are not prepared to play catch up.
If your bank went bust, your savings would not be protected under the Financial Services Compensation Scheme. This is because your savings are offset against a mortgage, therefore your savings would be wiped out if your bank went bust and you would simply owe what remained of your mortgage. A Ј200,000 mortgage with Ј50,000 of savings would leave an outstanding debt of Ј150,000 if the bank went bust. Visit the FSCS website for more information.
Should you consider an offset mortgage - the result!
An offset mortgage is a good product for people who have a large amount of savings, who can make additional payments to reduce their outstanding mortgage more quickly, and who need flexibility in their payments. But you do often pay extra in interest for the privilege, so be sure you are going to use all of the facilities available before choosing an offset mortgage.
If you think an offset mortgage is a good fit for you, then use our offset mortgage comparison table to explore the most up-to-date deals.
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs by comparing the best rates available.Source: www.money.co.uk