When it comes to mortgages in the U.K. offset mortgages are worth considering. They come with some clear advantages and disadvantages. In this article, we’ll break down the good and not-so-good sides of offset mortgages to help you decide if they fit your situation well.
Pros of Offset Mortgages:
- Save on interest: The standout benefit of an offset mortgage is that it can help you save on interest payments. Here’s how it works: your savings and current account are linked to your mortgage. The interest you pay is calculated based on the difference between your mortgage balance and your savings balance. So, the more you save, the less interest you pay on your mortgage, which lowers the overall cost of your mortgage.
- Easy access to savings: Unlike standard savings accounts, which may have tie-in or minimum notice periods, savings held in an offset-linked account can be accessed without hassle or penalties. This flexibility is great as it allows for funds to be readily available while helping reduce your mortgage interest.
- Tax-free savings: Most savings accounts now pay interest gross, which may be taxable based on your tax banding. With an offset-linked savings account, any interest earned on the balance held in the savings account is used to offset the interest payments on your mortgage; hence, this interest is not taxable. It is a great perk, especially if you are a higher-rate taxpayer.
- Pay off your mortgage faster: You can maintain your existing mortgage payment and by offsetting the savings interest against the mortgage, you can effectively overpay on the mortgage, which has the effect of reducing the mortgage term without actually reducing the mortgage term, enabling you to pay off your mortgage quicker. This is a fantastic feeling and frees up your finances quicker.
- Extra mortgage payments: Many offset mortgages let you make extra payments without any extra costs. This can help you bring down your mortgage balance even quicker, leading to more savings in the long run.
Cons of Offset Mortgages:
- Possibly higher interest rates: Offset mortgages might come with slightly higher interest rates compared to regular mortgage products. While the savings can outweigh this, it’s important to consider the overall costs involved.
- Limited lender options: Not all lenders offer offset mortgages, which narrows your choices. You might need to do some searching to find a lender that offers what you need.
- Requires self-control: To make the most of an offset mortgage, you need to maintain a good level of savings. Without discipline, you might not maximise your interest savings to make this worthwhile.
- Lower savings interest: Savings held in an offset-linked savings account won’t earn any interest. So, you won’t benefit from your savings growth as you might in a regular savings account.
- Need initial savings: You’ll need a sizeable amount of savings to benefit from an offset mortgage. If you don’t have much saved up, the impact on your mortgage interest might not be that significant.
In simple terms, offset mortgages can help you save on mortgage interest if you have surplus savings and want to retain easy access to those funds. But they may not be suitable for everyone, as they might have slightly higher interest rates and require additional financial discipline. Before choosing an offset mortgage, think about your financial situation and goals. If you’re not sure, talking to one of our mortgage experts can provide valuable advice to help you make the right decision.
Published October 2023
It is important to take professional advice before making any decision relating to your personal finances. Information on this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only.