Offset Mortgages

General - What are they all about? - So where is the catch? - Set up costs 

Offset Mortgages, General

 "...Offset mortgages are principally designed to allow you to use cash savings held in deposit accounts to reduce the interest charged on your mortgage."

     

Offset mortgages are the most flexible mortgage product. Offset mortgages are principally designed to allow you to use cash savings held in deposit accounts to reduce the interest charged on your mortgage. Offset Mortgages were a logical move in product design as the interest rates on a mortgage are invariably higher than that given on your cash savings. In addition, this savings interest is taxable at your highest rate of income tax. A distinct advantage of the Offset Mortgage is that the effective saving in mortgage interest is not currently taxable - a valuable benefit to any tax payer.

Before Offset Mortgages, the only way you could really use your savings to reduce your mortgage costs was to make an overpayment. This effectively meant giving up access to your savings, as you had used them to repay a part of your mortgage. 

Offset Mortgages changed all this by giving you a linked bank account along with your mortgage. In basic terms, the Offset Mortgage lender's computer look at the balance in your savings account (let's say £10,000), then look at your mortgage balance (let's say £100,000) and only charge interest on the net amount - which in this case would be £90,000. If at any point you need some of your savings, you can simply withdraw them from the bank account linked to your offset mortgage and top them back up at any time. 

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Offset Mortgages, so what are they all about?

Offset mortgages whilst originally designed to allow savings balances to be offset against your outstanding mortgage balance actually have a multitude of other features. The most common additional features of Offset Mortgages are,

  • A pre-agreed borrowing limit/reserve account. Should you need to borrow more money in the future for home improvements etc, the funds are already in place for you to draw on.
  • The ability to overpay and clear the loan quicker if you desire
  • The ability to underpay and take payment holidays. This is usually available after a period where you have overpaid on your mortgage or have a reserve account in place.
  • Linked current account banking, allowing you to open a current account with your mortgage lender and use the credit balance on your new current account to offset against your mortgage balance.
  • Lifetime Tracker Rates, whilst traditional mortgages offer this feature it is more common amongst Offset Mortgage Products. If you are not keen on having to review your mortgage or switch lenders every few years, an Offset Mortgage may be of more interest. 

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Offset Mortgages, so where is the catch? 

Offset Mortgages are extremely dynamic mortgage products, they offer a high degree of flexibility that allows you to adjust your borrowing and monthly payments as your circumstances change.

A small drawback of Offset Mortgages is that all of this flexibility often comes at a cost, with interest rates on Offset Mortgages traditionally being marginally higher than the cheapest traditional or non flexible mortgage product. For this reason anyone considering taking an offset mortgage should look at the likelihood of their requiring the additional flexibility and to what extend they may use any of the additional product features. If your main attraction is the use of the offset give consideration to exactly what savings balances you may have available to offset against your mortgage costs. If the level of your savings in relation to the mortgage balance is quite small, say 1% or 2% of the outstanding mortgage balance, a traditional mortgage may be better value for money. 

   

"...A small drawback of Offset Mortgages is that all of this flexibility often comes at a cost, with interest rates on Offset Mortgages traditionally being marginally higher than the cheapest traditional or non flexible mortgage product."

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Offset Mortgages, set up costs 

As previously mentioned, Offset Mortgages are in effect a special offer product. To obtain the Offset Mortgage products offered you usually will have to pay a booking fee. Over the last 18 months there has been a move by the lenders towards higher booking fee's. Historically you may have been able to obtain a fixed rate with a booking fee of £599, now a Lender is more likely to charge £999-£1999 or 0.5% - 1.5% of the amount borrowed for their best Offset Mortgages. 

It is extremely important not to become totally rate focused when choosing your mortgage. A very low offset rate mortgage (often the ones that look to good to be true) may come with excessive booking fee's and very little flexibility, making it very costly in the long run. If briefed to find the best mortgage deal, a good Independent Financial  Adviser will run an analysis based not only on the rate, but the amount you intend to borrow, the total interest and fee's payable when working out which mortgage is most suitable for you.

If you are considering a new mortgage or remortgage, please feel free to contact us to talk with an Independent Financial Adviser and Mortgage Broker. We are able to provide home appointments across the whole of West Sussex - Brighton, Hove, Haywards Heath & Crawley, East Sussex, Surrey - Croydon Sutton, Reigate, Redhill,  South London - Wimbledon, Fulham, Chelsea and Hammersmith and Central London.

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"Your home may be repossessed if you do not keep up repayments on your mortgage."