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Offset repayment mortgages

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By Pete Mugleston   Mortgage Advisor

Last updated: 10th April 2019 *

Many borrowers have never heard of offset repayment mortgages, and we get lots of enquiries from people who don’t fully understand how they work or what the benefits can be. This is a missed opportunity - in the right circumstances, an offset mortgage can help you save money on your monthly payments, or pay it off sooner.

In this article, we’re going to explain how offset repayment mortgages work, their pros and cons - and the kind of circumstances in which an offset repayment mortgage might be the best choice for you.

Here’s what you’ll learn in this article…

If it’s general information about offset mortgages you’re looking for, check out our comprehensive guide to them here.

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What’s an offset repayment mortgage and how does it work?

An offset repayment mortgage is a kind of ‘repayment’ based mortgage that also includes an ‘offset’ facility. Essentially, it is a way of using your savings to ‘offset’ the amount of interest you pay.

We’ll explain how both of these features work below:

What’s a ‘repayment’ mortgage? How does it work?

A ‘repayment’ mortgage is one in which your monthly repayments simultaneously pay off the capital and the interest on your mortgage loan.

This is in contrast to an ‘interest only’ mortgage - in which your monthly repayments only pay the interest due on your mortgage (and not the capital). The full balance of the mortgage is due at the end of the term (minus the interest payments, which you paid off in your monthly payments).

What’s an ‘offset’ facility? How does it work?

Offset is a feature in which your mortgage is linked to your savings account. Your cash savings are used to ‘offset’ the amount of interest you pay on your mortgage. The more you have in your savings account, the less interest you’ll pay.

With offset, your total mortgage interest is calculated as:

The difference between your total mortgage balance and the amount that you hold in your linked, offset savings account.

As a result, the money that you would have earned interest on is instead subtracted from the interest on your mortgage.

What will my mortgage repayments with an offset account be?

If you have a £100,000 mortgage and £20,000 in savings with the lender, then you’ll only pay interest on £80,000, not the full £100,000.

Scenario 1: You offset mortgage repayments

Your savings account is offset against your mortgage, meaning that you only have to pay interest on £80,000 of your mortgage (£100,000 mortgage - £20,000 on savings).

1 year of payments on £80,000 at 3% = £2,40

Total paid: £2,400

Scenario 2: You take the interest on your savings instead of offsetting

In this scenario, you don’t offset your £20,000 savings. Instead, you put them into a cash savings account that pays 1.5% (which is quite generous, at the time of writing).

(1 year of payments on £100,000 at 3% = £3,000) - (Interest earned on £20,000 savings at 1.5%, after tax = £240)

Total paid: £2,760

As you can see, in this case, offset mortgage payments save you £360 a year.

Remember: You can’t offset mortgage capital repayments, only mortgage interest payments.

It’s also worth bearing in mind that offset mortgages are a specific, separate type of mortgage product with different terms and interest only available from certain providers. You can’t simply ask your lender to start subtracting the balance of your mortgage interest payments using your cash savings account.

Offset mortgages are great when cash savings rates are low

Offset mortgages are particularly appealing when saving interest rates are low (as they are at the time of writing). The more you have in savings, the more you can offset - and the more you can save on your mortgage interest payments.

Can I get an interest only offset mortgage with no early repayment charge?

Yes, this may be possible as offset mortgages are usually offered by flexible lenders who offer features including waived early repayment charges and the option to overpay and underpay on your mortgage.

For specialist products like this, whole-of-market advice is essential to ensure you ended up with the best deal based on your needs and circumstances.

What are the pros of an offset repayment mortgage?

In order to establish whether an offset repayment mortgage is the right option for you, it’s important to weigh up the potential benefits on offer. They include...

At the end of the term, you own the property outright

Because your monthly payments apply to the interest and the principle when you pay off your mortgage you own the property - free and clear.

You can save money in some cases

Offsetting can allow you to get a better rate of return on your savings and pay less tax. Put simply, “you don’t pay tax on the interest that you save”.

If you do pay tax (and especially if you’re in the higher tax bands), putting your money in an offset mortgage will save you the tax that you would have paid on your savings - unless you had all of your savings in ISAs.

All of this can help reduce your monthly payments and, if you have an overpayment facility, allow you to pay off your mortgage sooner.

Taxation can be a complex matter for some individuals depending on the structure of your income so it’s always very important to seek independent advice from an accountant or tax advisor before making any decisions regarding your tax.

It’s somewhat flexible

You can continue to add more savings to the account that offsets your mortgage. And the more you save, the more mortgage interest you can offset. It’s worth remembering, however, that your mortgage payments can go up if you take money out of the offset account.

Keeping your money in an easy-access savings account offset against your mortgage provides easier access to your money than some of the alternatives.

For example - if you overpay a mortgage, the money you overpay from the mortgage is now tied up in your equity and is not easily accessible. Whereas with an offset account, you can easily access your cash savings if needed.

This also makes it a great option for self-employed people and others who fill a tax return at the end of the year. Money can be set aside to offset against interest until it has to be given to the taxman.

What are the potential drawbacks of an offset repayment mortgage?

It’s also vital that you offset the benefits against the possible pitfalls, which include...

Your mortgage payments may go up if you withdraw funds from your linked savings account

Things can change, and you may need to access some of the funds held in your offset account. This may result in an increase in your mortgage payments.

There’s less choice and it can sometimes be harder to get an offset mortgage

The best choice lender for a regular mortgage may not be the best option when it comes to getting an offset account.

Offset mortgages also account for a very small percentage of the total mortgage market. Being less popular, not all lenders offer them. As such, eligibility can be more of an issue.

It can be more expensive in some instances

As a general rule, you’ll pay more interest on an offset mortgage - which may outweigh the benefits you get from not paying the tax on your savings. This is particularly true if you and/or your partner pay tax at a lower rate, or you hold much of your savings in ISAs. Moreover, the savings in your offset account won’t accrue any interest.

Is an offset repayment mortgage right for me?

It depends, if you don’t have much in the way of savings to offset, you may end up paying a higher mortgage rate for no real gain.

As you can see from above, whether an offset mortgage is right for you depends largely on your personal circumstances. This includes:

  • How much you have in savings and the rates you’re getting on them
  • Your tax position
  • The kind of mortgage products you’re eligible for
  • The terms and size of your current mortgage
  • Whether you want to overpay
  • Whether you want to own the property outright at the end of the term or refinance

It all generally boils down to the following comparison:

The amount you’d save in mortgage interest by offsetting your savings account vs. the amount of interest your savings would accrue if you’d kept the accounts separate.

Either way, it could be a close call and it’s safe to say that offset repayment is worth looking into.

How do I find the best offset repayment mortgages?

Not all mortgage providers are willing to offer offset mortgages, so seeking specialist advice from a whole-of-market broker is vital to ensure you end up with the best rates.

Furthermore, applying for an offset repayment mortgage through the advisors we work with could also save you potential marks on your credit file. Approaching multiple lenders in search of the best deal could mean too many hard searches on your report.

The brokers we work with can also provide bespoke advice on offset products and introduce you to the lender best position to offer favourable rates to a customer with your needs and circumstances - make an enquiry to speak with one of them today.

Talk to a broker who can help you work out if an offset repayment mortgage is right for you

The brokers we work with have access to the best offset repayment mortgages and can help you examine all of your options.

If you have any questions want to speak to a friendly expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 10th April 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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