Wondering how to save money on your mortgage? Looking for a way to shorten your mortgage term or reduce your monthly payments? An Offset Mortgage could provide the answer.
An Offset Mortgage is a blend of a traditional mortgage linked to a savings accounts held with the same lender.
The mortgage interest will be offset by the savings account interest. This may help you reduce the overall cost of the mortgage by hundreds if not thousands of pounds, depending on your savings.
How do Offset Mortgages work?
When you apply for an Offset Mortgage, the lender will open an Offset Savings Account to run alongside your Mortgage Account.
The savings in this account are used to reduce the amount of interest charged on the mortgage, so you will only pay interest on your mortgage balance minus your savings balance.
In general, mortgage interest rates are higher than the rate earned on the savings account so this solution can save you money.
You can use an Offset Mortgage to lower your monthly mortgage payments. Alternatively, you can shorten the length of your mortgage term, enabling you to become mortgage-free sooner.
Reducing your monthly payments.
The following example shows the savings that can be made if you use your Offset Mortgage to reduce your monthly payments.
Consider the example of a person who has a mortgage of £300,000 paying an interest of 2% and £100,000 in savings which earns 1%.
With an Offset Mortgage, the £100,000 savings will be linked to the £300,000 mortgage reducing the outstanding amount to £200,000. This means you will only be paying interest on the outstanding balance of £200,000.
The interest saving over the course of the year would be £2,000, whereas you would have only earned £1,000 if you had left the savings in the savings account.
Shortening the term of your mortgage.
If you choose to continue to pay the same amount each month as originally agreed with the lender, you will actually be overpaying your mortgage each month. Overpaying the mortgage can shorten the term of the mortgage.
For example, if you had a £300,000 mortgage at 2%, you would pay £1,272 a month. This is if the mortgage is on a repayment basis over a 25-year period. If you offset £100,000 of savings and keep your monthly payments the same, this would save you £18,135 in interest alone. This would mean you pay the debt off a full 6 years and 8 months earlier.
Are there overpayment charges with Offset Mortgages?
Having an Offset Mortgage account doesn’t affect your annual repayment limits. The monthly additional payment created as a result of the offset is technically not an overpayment. Hence, an early repayment charge will not be applicable on settlements made through the monthly offset.
You can still use your savings with an Offset Mortgage?
With an Offset Mortgage, you can still use your savings if you want to. This is because the savings are not being used to repay the mortgage. If you use your savings, it will simply reduce the amount of interest you will save.
Who are Offset Mortgages suitable for?
Offset Mortgages are especially suitable for:
- High taxpayers, who may otherwise lose part of their savings interest to tax
- Self-employed individuals who have cash set aside to pay their tax liabilities
- Those who are unhappy with the interest offered by a normal savings account.
So, if you are keen to
- reduce your mortgage payments
- or shorten your mortgage term
- or reduce the amount of tax you pay on your savings interest
then, why not link your nest egg with your mortgage?