Is an Offset Mortgage right for You?

26-Nov-2009

A survey of homeowners and potential buyers has shown that 40% do not fully understand the benefits of an offset mortgage.  The research, carried out by UK online bank first direct, highlights the fact that many consumers may be missing out on a flexible mortgage product that could provide significant savings on their home loans.  So what exactly is an offset mortgage, and who is it suitable for?  

The main feature of an offset mortgage is that you can reduce the interest that you pay for your mortgage, by offsetting the balance against your savings.  For example, if you took out an offset mortgage of £100,000 and you had savings of £15,000, you would only be charged interest on £85,000 of the mortgage balance.  As a trade-off, you would not receive any interest on your savings.

The main reason why an offset mortgage should be a consideration in the current climate is that savings accounts are (on the whole) not offering the same returns as they were several years ago.  If you do have savings, offsetting them against your mortgage balance may therefore offer a higher rate of interest overall than keeping them in a standard savings account.  In addition, any interest that you earn from your savings is not taxed if it is offset against your mortgage.  You would be hard-pushed to find an equivalent return on your savings, especially if you are a higher rate taxpayer.  

With most offset mortgage providers, you also have the option of including your current account balance in the calculations.  This means that if you have a mortgage balance of £100,000, savings of £15,000 and an average current account balance of £1,000, you would be charged interest on £84,000 of your mortgage balance.  As you would usually not receive a very high return on money that is kept in your current account (because current accounts are intended for everyday transactions, rather than savings), it makes sense to use this money against your mortgage balance.  However, unlike other mortgage types, you would still have access to the savings in case of emergency.

Offset mortgages are most attractive to people with a larger mortgage balance and also some savings (or a salary scheme that includes bonuses), due to the flexibility and the likelihood of paying off the mortgage balance early.  However, it's important to note that if you have any other debts, any savings benefits that you enjoy may be cancelled out by the interest you have to pay on your debts.  Work out whether it is more cost-effective to pay off the debt first ? this is likely to be the case for high-interest debts such as credit card balances, but not necessarily for student loans or longer-term personal loans where you may be charged an early repayment fee.

With an offset mortgage, you would normally be expected to use the same provider for your mortgage and your savings account.   This means that you have to look not only at the rates of interest that you're charged on the offset mortgage, but also at the rate of interest that the provider pays out on current and savings accounts when deciding whether this type of mortgage makes the most sense for you. 

The increased flexibility of an offset mortgage means that the interest rate is likely to be higher than say, a fixed rate mortgage.  If you do not have many savings, an offset mortgage may not be right for your circumstances and a fixed rate mortgage might actually offer a more competitive rate.  Fixed rate mortgages are actually much more flexible than they were in the past, and you have the added benefit of guarding against any interest rate rises.  To talk through your options with a qualified mortgage adviser and receive a free, no-obligation quote, please fill out our short mortgage form.