While rising interest rates are bad news for borrowers, those with savings may benefit from an offset mortgage, reducing your term and the interest you pay.
An offset mortgage enables you to link savings to a mortgage on your main home or a rental property, reducing the interest. Unlike overpaying on your mortgage, which also reduces the interest, an offset is more flexible as you retain access to your cash. This enables you to get the same benefit of reduced mortgage interest but you can still access your money with little or no notice if you need it in an emergency.
Higher-rate taxpayers in particular benefit from offsets as their savings attract no interest and do not have to be declared as taxable income. At a time when savings rates are rising from the doldrums, not paying interest on these earnings could be very attractive.
Offset mortgages are also popular among self-employed borrowers who may be building up their savings in order to pay a tax bill at the end of the financial year. An offset lets them use those savings in the meantime to reduce the interest they pay on their mortgage, while they don’t have to give any notice to access the money to pay their tax bill.
They may also appeal to those in receipt of large bonuses that they will need to draw on eventually but want to use in the meantime to reduce the interest they pay. Some parents link their savings with their children’s mortgages so that they pay less interest; this enables the Bank of Mum and Dad to offer financial assistance while still retaining access to their savings.
There may be a slight premium to pay on the rate on an offset mortgage compared to standard loans as there is less choice of deal available. But given that an offset is one of the few truly flexible mortgages, it may be worth paying the premium in order to access the benefits, particularly for those with substantial savings.
Those considering an offset mortgage should take specialist tax advice to ensure it is the right product for their circumstances. It is also worth talking to a whole-of-market broker such as AWS Private Finance, to make sure it is the right product for you, particularly as only a few lenders offer offset mortgages.