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Offset Mortgages Explained

  • 3 years ago

If you have a fairly healthy balance in your savings account and you’re about to look for a new mortgage deal, then an offset home loan cold be ideal for you.

What is an offset mortgage?

An offset mortgage lets you offset any savings you have against the outstanding amount of your mortgage loan so you only pay interest on this reduced amount. 

For example, if you have £200,000 outstanding on your mortgage and £40,000 in your saver, you’ll only pay interest on £160,000 of the mortgage. It’s a good way to reduce your monthly costs or to pay down your loan faster.

You do have to have your mortgage and your savings account with the same provider, but changing one or the other may be worth the effort if you’re paying less interest each month. You can either reduce your monthly mortgage payment and trouser the difference or keep it the same but pay more off the principal each month.

The pros and cons of offset mortgages

The UK’s interest rates are at a record low of 0.1% and have been for almost a year now, which means that your £40,000 savings pot might not be doing much for you. However, as mortgage interest rates are considerably higher than 0.1%, your savings will “shield” £40,000 of your mortgage balance from the 1.5% or 2% interest the rest of the loan faces.

If your mortgage interest rate is higher than your savings rate, it makes sense to think about an offset mortgage. BY the end of each year, you could have saved more in mortgage payments than you’d have earned from your savings.

Offset mortgage rates can be higher than “regular” home loan rates

The downside to this scenario is that the interest rates on offset home loans can be a shade higher than non-offset deals, which can cancel out any savings unless you have a big pot stashed away. 

Having said that, these offset deals have become cheaper in the last couple of years, so it’s a case of doing the maths to find a rate that will see you slightly more in the black each month than a regular sort of home loan would.

A rare beast

The other issue with offset mortgages is that there aren’t as many products of this type as there used to be, with around 160 on the market right now, compared to 210 a couple of years ago.

If you do find an offset product that suits you and is with the right provider, then just make sure that it’ll save you money before you opt for it. The higher your savings balance, the more likely this is. Of course, if you’re still undecided or unsure, then your lender or financial advisor will be able to help you further.

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