Offset mortgages can be a great way to save money. They can either help you reduce your monthly payments, or shorten the term and help you get mortgage-free sooner.
But so many of us don't understand them - some don't even know they exist! And that's a crying shame, because those not considering an offset mortgage are potentially missing out on £1,000s in savings.
Offset mortgages are a type of product that let you link your mortgage to your savings.
The savings balance is used to reduce the amount of interest charged on the mortgage. Your savings will be "offset" against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest. It works something like this:
With your offset mortgage, you can choose how to benefit from the interest you save:
You might have been put off an offset mortgage because you've heard it's more expensive or too restrictive, but the truth is quite different…
Once your savings are offset against your mortgage, you can still add to them – more money offset means more interest saved.
Some offset mortgages also allow you to overpay. This will have the same effect of saving you interest, but with one big difference…
Overpaying means you physically repay part of your mortgage – you may lose access to this money if you need it later. Offset savings, on the other hand, remain alongside the mortgage. They don't repay it, so you still have access to your money.
As opposed to becoming a guarantor, or physically giving your child money towards buying a new home, offset mortgages offer a great alternative.
Some offset mortgages allow family to offset their savings against a relative's mortgage. The benefits are that:
The parent can then transfer their money into a normal savings account - once the child is ready to take the reins of the mortgage fully.
Offset mortgages are a great way to save interest on your mortgage, but there are disadvantages as well:
Save more interest than you can earn in a savings account
Pay no tax on the interest you save – you may have to pay tax on interest earned on a normal savings account (apart from cash ISAs)
Keep easy access to your savings (remember the mortgage payment may go up if you make a withdrawal from your savings)
Finish your mortgage sooner, or make lower monthly payments
Help a child or relative get on the property ladder
Your savings don't earn interest. So if you rely on your savings for income, offsetting against someone else's mortgage is not a good idea
Your savings will lose their spending power, as they won't grow
Speak to a mortgage broker
More mortgage guides
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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