While rising interest rates are bad news for borrowers. They do make one type of mortgage more attractive – and that’s an offset. Offset mortgages enable you to offset your savings against your mortgage, reducing the term and the interest you pay. There hasn’t been much incentive to keep lots of cash in savings in recent years. Because interest rates have been so low but that situation is now changing.
An offset mortgage lets you link one or more savings accounts held with your lender to your mortgage, reducing the overall interest you pay. Essentially, you pay interest on the difference between your savings and your mortgage. Unlike overpaying on your mortgage, which reduces the interest, with an offset you retain access to your cash so you get the same benefit in reducing your mortgage payments but can access your money at any time if you need it. It offers the ultimate in flexibility.
Offset mortgages are particularly popular among the self-employed who need to build up their savings in order to pay their tax bill at the end of the tax year. An offset lets them use those savings in the meantime to reduce the interest they pay on their mortgage, while the money remains accessible for when they need it.
You don’t earn interest on your savings with an offset. So the added benefit is that you don’t pay tax on any interest accrued from your savings. As you would with a ‘normal’ savings account. For example, a higher-rate taxpayer with a £750,000 mortgage on a £1m property. With a 25-year term and £75,000 in savings could reduce the term of their mortgage by three years and one month, saving £52,618 in interest. They would also save £15,211 in tax on their savings interest.
There aren’t many offset mortgages around so you may have to pay a slight premium on the rate compared. With a non-offset loan – both fixes and trackers are available. But given that it is one of the few truly flexible mortgages. It may be worth paying this to access the benefits. And, of course, those with substantial savings will reduce their interest rate anyhow.
With only a few lenders offering offset mortgages, a whole-of-market broker such as AWS Private Finance will point you in the right direction. Get in touch to find out whether an offset is the right mortgage for you.