Offset Mortgage

An offset mortgage can save you thousands of pounds in interest and allow you to pay off your mortgage early. Get the best rates by contacting an expert mortgage broker who will advise you which lenders are currently offering the best offset mortgage deals.

How they work

Offset mortgages work by balancing the money in your savings and/or current accounts against the capital debt and interest you owe the mortgage lender. Put another way, each 1 you keep in your bank account is 1 of debt you no longer have to pay interest on. This means your savings are constantly reducing your mortgage debt and preventing the lender from charging you interest on the entire debt - enabling you to pay off the mortgage earlier. It is a trade-off: instead of earning interest on your savings (which are normally subject to tax), you pay less interest on your mortgage because you effectively owe less money.

But it's a trade-off worth making, because at the end of the mortgage term, you'll effectively have saved money tax-free at the interest rate of the mortgage which means the financial rewards are likely to be as great - if not greater - than most fixed term savings accounts on the high street. Yet unlike these savings accounts, during the mortgage term, your money is immediately accessible should you need it in an emergency.

Not just for savers

While most borrowers with offset mortgages try to save as much as possible (as every penny you save helps to pay off your mortgage quicker), you do not need to have any savings in order to benefit from an offset deal. This is because many offset mortgages allow you to offset whatever money is in your current account, as well as your savings account. And some lenders, such as the One Account, will even allow you to offset against your credit card debts, along with your mortgage debt.

You do not have to have substantial savings either or keep your savings in your bank account for the whole mortgage term. That's why offset mortgages are particularly useful for self-employed borrowers who save up throughout the year to pay their tax bill in January. Even though your hard-earned cash is just sitting in your bank account waiting to be handed over to the Treasury, it will help pay off your mortgage from February to December.

The maths

Say, for example, you take out a 150,000 offset mortgage with a bank and put your 16,000 savings into a savings account with the same bank. Unlike other types of mortgages, because you are 16,000 in credit, the lender will only charge you interest on 134,000.

As long as you keep that 16,000 in your offset savings account, the mortgage debt is likely to be cleared in just 21 years and 5 months instead of 25 years, saving you around 45,000 - a significant amount of money.

PROS of an offset mortgage

Can save you money in interest payments Offers the potential to cut down your mortgage term Tax-efficient

CONS of an offset mortgage

Forces you to use the current and/or savings accounts provided by the mortgage lender No interest earned on savings

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