What is an offset mortgage and could it work for you?
Mortgages come in many shapes and forms but for those of you who have some savings in the bank, an outside contender could be one that 84% of our followers didn't even know existed...
With interest rates at an unprecedented low, it’s no longer the done thing to stick your money in a savings account, let it accrue interest and forget about it. In December 2020 interest rates were as low as 0.19% which means for every £100 you had in the bank, you earned a measly 19p...peanuts.
So, let us introduce you to the Offset Mortgage - an option that can make those savings work that little bit harder.
An offset mortgage links your borrowing to a savings account(s) of your choosing, meaning the value of your savings is deducted from your outstanding mortgage balance, so you will only pay interest on the difference.
For example, if you have £10k in your savings account but have a mortgage of £200k. By using an offset you will only pay interest on £190k.
Using the above figures, if you continue to top up your 'Offset savings account' by £200 per month, you could save circa £49,292 and reduce your mortgage term by 4.5 years.
The other positive is, just like any savings account, you can access and withdraw your money at any point. You’ll just be paying interest on the higher amount left on the mortgage.
Is it right for me?
The Offset Mortgage is likely to be most suitable for those with bigger savings. You will also need at least a 15% deposit to gain access to the offset product. Some offset mortgages carry higher interest rates but there are competitive options available.
Take our own mortgage for example - we have a 20% deposit and the most competitive rate available to us is 2%, whilst the most competitive offset option is 2.11% - meaning we'd only be paying an extra £18 per month.
So to recap the pros and cons of an Offset Mortgage...
You’ll save more in interest than you will usually earn in your savings account
Any savings in the offset are accessible at any point which is a more flexible option than making mortgage overpayments
You can choose to reduce your monthly payments or reduce the term
You won’t pay any tax on the interest you save
Your savings won’t accrue interest
Rates are a little higher meaning the monthly repayment can be more expensive
There is a minimum deposit of 15% to access the product.
As with any financial product, please always do your research and speak to a financial advisor before making any big financial commitments.
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