Striking the balance - cutting costs with an Offset mortgage
September 2023
Striking the balance - cutting costs with an Offset mortgage
September 2023
With interest rates at their highest level since 2008, those with money to put away again face an old dilemma. Is it better to save for a rainy day or pay down debt? Well, why not do both? For homeowners, an Offset mortgage means they can. It puts holders’ savings to work in a linked account to reduce the amount they pay on their mortgage.
The concept is simple. If a borrower takes a mortgage for £200,000 (about the UK average)1 but keeps £20,000 in their Offset savings account, they’ll only be charged interest on the difference: £180,000.
Repayment mortgage borrowers can choose whether this Offset benefit is used to reduce their monthly payment (as with an interest-only loan) or to pay back their mortgage quicker. Either way, it can substantially reduce the overall cost of repaying a mortgage.
For interest-only mortgages it’s only the interest charged on the mortgage balance each month that is paid back. Any savings will also reduce that payment. At the end of the mortgage term the initial mortgage still needs to be paid off. For repayment mortgages the payments made cover the initial loan and the interest. Any savings can be used to reduce repayment amounts or the mortgage term meaning that the mortgage is paid back quicker.
A win-win
High inflation means that the value of savings is being eroded, and it’s essential to consider how to get the best out of your money. On the other hand, higher interest rates mean borrowing also costs more. An Offset mortgage utilises savings to reduce the cost.
Of course, those with savings have always been able to reduce repayments. They could either borrow less initially and put a bigger deposit down on their house, or simply overpay their mortgage. But many may not have money to spare when they take out a mortgage, and even if they can overpay (some mortgages don’t allow it, while most have a limit), it’s an irreversible decision. Once someone makes an overpayment, the money’s gone. For many in these uncertain times, the security savings provide is vital.
An Offset mortgage squares that circle. It can reduce monthly repayments at a time of increasing living costs while leaving the money available, should it be needed. Borrowers can access their savings whenever they want.
Is it for you?
Whether a borrower is eligible for an Offset mortgage depends on several factors, including the property type (usually restricted to residential property, so no Buy to Let), credit score, Loan to Value (LTV) ratio, and loan terms. There are additional requirements for an interest-only Offset mortgage, too.
While many can benefit, Offset mortgages are particularly useful for certain groups. Most obviously, the greater the balance in the Offset savings account, the greater the benefit. Large lump sums from inheritance, bonuses, or pensions can significantly reduce the interest on the mortgage while leaving the money available.
Also, while those using an Offset mortgage don’t earn interest on the savings in an Offset account, they also don’t pay tax on the interest they save. For higher-rate taxpayers, particularly, an Offset mortgage could save more on interest repayments than they would earn in a savings account after tax.
Finally, Offsets can be a real boon for self-employed people, who often receive irregular income. Offsetting to lower monthly repayment bills can be helpful for them and enable them to keep cash ready for paying tax bills while putting it to work.
As with any financial product, it’s vital that borrowers seek advice to know if an Offset is the best choice for them. For some combining savings and debt reduction could offer that rare thing in these difficult times, the best of both worlds.
1 https://www.statista.com/statistics/915977/average-value-of-mortgage-granted-in-the-united-kingdom/
With interest rates at their highest level since 2008, those with money to put away again face an old dilemma. Is it better to save for a rainy day or pay down debt? Well, why not do both? For homeowners, an Offset mortgage means they can. It puts holders’ savings to work in a linked account to reduce the amount they pay on their mortgage.
The concept is simple. If a borrower takes a mortgage for £200,000 (about the UK average)1 but keeps £20,000 in their Offset savings account, they’ll only be charged interest on the difference: £180,000.
Repayment mortgage borrowers can choose whether this Offset benefit is used to reduce their monthly payment (as with an interest-only loan) or to pay back their mortgage quicker. Either way, it can substantially reduce the overall cost of repaying a mortgage.
For interest-only mortgages it’s only the interest charged on the mortgage balance each month that is paid back. Any savings will also reduce that payment. At the end of the mortgage term the initial mortgage still needs to be paid off. For repayment mortgages the payments made cover the initial loan and the interest. Any savings can be used to reduce repayment amounts or the mortgage term meaning that the mortgage is paid back quicker.
A win-win
Of course, those with savings have always been able to reduce repayments. They could either borrow less initially and put a bigger deposit down on their house, or simply overpay their mortgage. But many may not have money to spare when they take out a mortgage, and even if they can overpay (some mortgages don’t allow it, while most have a limit), it’s an irreversible decision. Once someone makes an overpayment, the money’s gone. For many in these uncertain times, the security savings provide is vital.
An Offset mortgage squares that circle. It can reduce monthly repayments at a time of increasing living costs while leaving the money available, should it be needed. Borrowers can access their savings whenever they want.
Is it for you?
Whether a borrower is eligible for an Offset mortgage depends on several factors, including the property type (usually restricted to residential property, so no Buy to Let), credit score, Loan to Value (LTV) ratio, and loan terms. There are additional requirements for an interest-only Offset mortgage, too.
While many can benefit, Offset mortgages are particularly useful for certain groups. Most obviously, the greater the balance in the Offset savings account, the greater the benefit. Large lump sums from inheritance, bonuses, or pensions can significantly reduce the interest on the mortgage while leaving the money available.
Also, while those using an Offset mortgage don’t earn interest on the savings in an Offset account, they also don’t pay tax on the interest they save. For higher-rate taxpayers, particularly, an Offset mortgage could save more on interest repayments than they would earn in a savings account after tax.
Finally, Offsets can be a real boon for self-employed people, who often receive irregular income. Offsetting to lower monthly repayment bills can be helpful for them and enable them to keep cash ready for paying tax bills while putting it to work.
As with any financial product, it’s vital that borrowers seek advice to know if an Offset is the best choice for them. For some combining savings and debt reduction could offer that rare thing in these difficult times, the best of both worlds.
1 https://www.statista.com/statistics/915977/average-value-of-mortgage-granted-in-the-united-kingdom/
Related articles:
Product transfer or remortgage?
Making an informed choice based on your individual circumstances.
Related articles:
Product transfer or remortgage?
Making an informed choice based on your individual circumstances.
