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What is an Offset Mortgage?
An Offset Mortgage is a relatively new idea introduced by mortgage lenders, which allows the borrower to bring their savings money together with their mortgage to reduce monthly payments and potentially the term of their mortgage.
Most people split their finances up into different saving, mortgage and borrowing accounts to perhaps achieve the above aims.
For borrowers who have substantial savings elsewhere and suffer tax on any interest payments made by the savings company can use their savings to offset mortgage interest. As the borrower does not receive credit interest, there's no tax to pay.
This is great news for basic rate taxpayers and even better news for higher rate taxpayers.
What are the benefits?
An Offset Mortgage ensures that all your day-to-day savings receive the same level of return as the interest charged by the lender.
Offset Mortgages are flexible so that you can make overpayments on your mortgage at any time.
Offset Mortgages in real terms could mean that you could save thousands and pay off your mortgage earlier.
Offset Mortgages are variable which means that the interest rates available will not allow you to arrange Fixed/Capped rate mortgage but the effective interest paid will always be the same as the variable rate charged by the mortgage lender.
Offset Mortgages reduce the cost of your mortgage by using your money more effectively.
What accounts can you link to an Offset Mortgage?
Generally Offset Mortgages allow you to link current or savings accounts to your Mortgage account.
You won't be able to link a cash ISA/TESSA or other investments you may have to your offset Mortgage.
Will an Offset Mortgage be suitable for me?
1. An Offset Mortgage is suitable for people who have a bigger mortgage than their savings
2. An Offset Mortgage is suitable for tax payers
3. An Offset Mortgage is suitable for borrowers who want to take control of their mortgage
4. An Offset Mortgage is suitable for borrowers who want to pay less on their mortgage
5. An Offset Mortgage is suitable for borrowers who want to pay off their mortgage early
6. An Offset Mortgage is suitable for borrowers who want to have flexibility over their mortgage payments.
How does an Offset Mortgage work for sole and joint customers?
If the Offset Mortgage is set up in a sole name, any sole current and savings accounts in the same name can be linked.
The Offset Mortgage holder may also group joint accounts with one other account holder. Sole accounts belonging to the joint account holder are not permitted.
If the Offset Mortgage is in joint names, any current and savings accounts held in either party's sole name and/or both joint names can be linked.
What happens to the interest that would normally be credited to your current and day-to-day savings accounts?
The interest payment will no longer be paid on these accounts as any credit balances reduce the total amount owing on the mortgage and therefore reduce the daily interest charged on the mortgage.
As previously mentioned should you be in the unusual position that your total credit balances exceed your mortgage debt you will not receive any interest on the accounts linked to your Offset Mortgage.
Offset is therefore only suitable if debts exceed savings.
What are the tax advantages?
Returns on savings are not treated as interest. As you do not receive interest on your savings you have no tax to pay on them - instead, you reduce the amount of interest that you pay on your borrowings.
Basic rate taxpayer’s example:
If you have a savings account paying 5.0% interest and pay tax on your interest at 20%, then your net interest rate is 4% (20% of 5.0% is 1.0%).
What if I you have a lump sum should you consider putting it in your mortgage, savings or current account?
Should you do so lump sum will reduce the amount of interest you pay on your offset Mortgage.
The benefit of leaving your money in your current account is that you retain instant access to your funds using your debit card or cheque book.
Can an Offset Mortgage offer flexibility?
Yes is the simple answer you have flexibility to choose how to repay the capital element of your Offset Mortgage. This means you can make payments to reduce capital whenever you want. If your circumstances require it, you can even take a break from repaying your capital at any time, and if necessary borrow back any capital you have previously paid.
PLEASE REMEMBER YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT
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