An offset mortgage is a type of mortgage that is linked to your savings account. Certain types of offset mortgage could also allow you to link a current account, credit card or unsecured loan to your mortgage.Offset mortgages normally work in the following way:
- Credit balances in your linked accounts will be offset against debit balances
- Interest will only be charged on debts
For example; if you had a mortgage of £150,000, and savings of £20,000, you would only pay interest on £130,000.
An offset mortgage could potentially offer you the following benefits:
- Tax advantages
Savings accounts are normally be affected by income tax, however, by linking your savings account to an offset mortgage, you would not have to pay income tax on your savings
Most offset mortgages will let you make over- or underpayments as well as take payment breaks without penalising you
- Early repayment
Monthly repayments on an offset mortgage deals will usually be based on the size of the whole mortgage loan; you could therefore end up ‘overpaying’ each month, resulting in your loan potentially being paid back earlier than expected.
- Arrangement fees
Most offset mortgage products tend to come with costly arrangement fees, however it could be worth weighing up these against the overall savings you might make on an offset mortgage.
- Interest rates
Taking out an offset mortgage means that you lose out the opportunity to earn interest on your savings; furthermore, interest rates on your offset mortgage debt may also be slightly higher than that of a standard mortgage.
- Requires a great deal of discipline
Although the flexibility of an offset mortgage could pose itself as a benefit, it is important that you carefully consider any withdrawals you might make; remember that as your savings balance decreases, the interest on your mortgage loan will increase.
Before you choose an offset mortgage, it is important that you determine exactly which type of offset mortgage you are looking for.
There are a number of different options that could be available to you, each with their own advantages and disadvantages.
There are two main payment options for an offset mortgage:
A repayment offset mortgage would involve you being required to make monthly payments until the end of the mortgage’s term when the loan will have been cleared.
- Interest only
Interest only offset mortgages only oblige you to make monthly interest payments; at the same time, you will be expected to pay into a long-term savings plan that will hopefully be able to pay off your mortgage loan upon maturity.
You may also like to consider the type of interest rate you would like on your offset mortgage:
- Fixed rate
A fixed rate offset mortgage would have an interest rate which has been set at a certain amount for a certain period; following this, your interest rate is likely to revert to the lender’s standard variable rate (SVR).
A tracker offset mortgage has an interest rate that is linked with the Bank of England base interest rate, meaning that it could move up or down.