Offset Mortgage

Podcast approved by The Openwork Partnership on 08/08/24.

What is an offset mortgage and how does it work?

An offset mortgage is a mortgage product that comes with a linked savings account. Any balance you have in the savings account is deducted from the mortgage balance when they’re calculating the interest on your mortgage.

As an example, if you’ve got a £1 million pound mortgage and £250,000 cash in the linked savings account, the balance used to calculate the interest would be £750,000.

It’s a means of utilising your savings to reduce the mortgage balance when interest is applied.

How can an offset mortgage help me save money? How much could I save?

It’s reducing the amount of interest you’re paying on your mortgage, by effectively reducing the balance. You could save money in two ways with an offset mortgage: you either reduce the monthly payment or reduce the overall term of the mortgage.

The lender could just charge you less interest each month so that your monthly outgoings are lower. Or, you keep your monthly payments consistent, as if you had the larger mortgage balance. But because you’re paying less interest, more of that monthly payment is reducing the capital on your loan – so you’ll pay off your mortgage quicker.

How do I know if I’m eligible for an offset mortgage?

The eligibility criteria for offset mortgages is the same as on standard products. They don’t generally have any specific additional requirements from you as the borrower.

It comes down to whether or not it’s worthwhile for you – how much you have to put into the linked savings account and how regularly you could add to that.

The downside to offset mortgages is that the interest rates are generally higher than on standard products. So the benefit of having that offset account and putting savings in it is reduced in some ways.

Can I still deposit and withdraw from my savings?

Yes, you could. You have full access to that money at any point. That’s the advantage of using an offset mortgage rather than paying down your mortgage.

Some lenders charge interest daily, some monthly. If you put money into that account or withdraw it, the interest is calculated accordingly. But you do have access to it at any point and you could make deposits or withdrawals.

It’s quite good in that you could make those savings work for you and reduce the balance you’re paying interest on, without actually overpaying on your mortgage and losing access to those funds.

Can I overpay or repay my offset mortgage?

Yes, you could. Most lenders will have an overpayment facility on your mortgage of 10%. Some go up to 20% on fixed rate deals. That’s usually the same for offset mortgages.

If you’re within a fixed rate period on an offset mortgage, you could overpay. But given the design of an offset mortgage, there’s not really any need to. In my opinion, you’d be better off putting that money into the linked savings account. It’s having the same impact, in that you’re reducing the mortgage balance, reducing that interest, but you still have access to the money.

If you’re within a fixed rate period, there will likely be penalties if you repaid it in full. I would just put that money into the link savings account, reduce the mortgage balance you’re paying interest on and wait until the end of that fixed rate term. It’s a slightly different way of doing it, where you don’t have any penalties to pay.

Do many lenders offer offset mortgages?

Sadly not. Not many lenders offer them, but they could be really useful in some circumstances.

The main lenders at the moment for offset mortgages are Coventry Building Society and Accord, which is part of Yorkshire Building Society. Barclays dip in and out. They sometimes have offset products available, and sometimes they are only available to existing customers.

Recently we lost Scottish Widows in the offset space – they are not doing any new lending. There’s are a good number of options there, but I would like to see more [podcast recorded in July 2024]

What are the advantages and disadvantages of an offset mortgage? Is it worth having an offset mortgage?

It’s very much down to individual circumstances, and there’s obviously a calculation to run. The key advantage is that the balance of your offset savings account is deducted from the mortgage balance. It’s a good way to reduce the amount of interest you pay on your mortgage.

The other advantage is that you’ve still got instant access to those funds. The disadvantage of an offset mortgage is that the interest rate is going to be slightly higher, so you’re paying a bit of a premium for that feature.

The other disadvantage is that you need to consider carefully whether it’s worthwhile. Is the opportunity worth what you’ve foregone by not having that money invested elsewhere?

As a very simple example, let’s say you’ve got a mortgage at 5% and putting money in the offset account is saving you 5% a month. But if you’ve got a cash savings account that’s giving you 3% a month, the actual benefit is only 2%.

Whether it’s worthwhile will depend on a few things: the difference in interest rate between a standard product and offset product; plus how much you’ve got to put in that account. That includes both the savings you have currently and what you anticipate putting in over the course of the term. You also need to consider what you would be doing with those funds if they weren’t in the offset account.

There are quite a few moving parts there. There are calculators we could point you towards to work out if offset would be better off over the term. It’s all down to individual circumstances, but those tools can be useful.

A good example of where we often set up offset mortgages is with clients who are paid gross of tax – typically lawyers who are partners in law firms. They have to retain money to pay their tax bill. But because it’s not necessarily due for 18 months, they’ve got a decent amount of money in savings.

They could use those funds in an offset account. They’ve got access to it at any point, so when they need to pay their bill, they can use them. They’re not paying interest on that level of savings.

Can I set up an interest only offset mortgage?

Yes. On an interest only basis you could only reduce the monthly payments, as you can’t shorten the term by repaying the mortgage. Any money you’ve got in the offset account is deducted from the mortgage balance and reduces the interest accordingly.

If you’re fortunate enough to have cash savings to cover the mortgage balance, you could put everything you have into the offset account and pay zero interest on the mortgage. At any point, you could withdraw the full balance.

A typical example is if your own residential mortgage is paid off but you’re looking to buy a second home. You could take out an offset mortgage on your current residential property, on interest only, and put the money straight into the linked savings account – then you won’t be paying any interest on that.

There’ll be zero cost per month of having those funds available to you. Then, as and when you need the cash, whether it’s to buy a plot of land or pay a builder, you could just take those funds out as needed. You only start paying or interest once it’s out of the linked savings account.

So there’s a lot of clever things we could do with an offset mortgage for the right type of clients.

How can a mortgage broker help with an offset mortgage?

Speaking to a broker is always a good idea. There aren’t many lenders in the market, so we could explain who they are and what their policy is, which is always going to be useful.

As we said at the start, things constantly change. Just because something might be the case now, it’s not going to be in a couple of months’ time. It helps to have someone in your corner that keeps abreast of those changes.

I’d always say get a mortgage broker to help you in any situation, but with something more tricky like offset, it’s definitely worth having someone there to help you.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 08/08/24.