The advantages and disadvantages of offset mortgages
Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 29th March 2019 *
Most people associate mortgages with a standard repayment plan, in which you put down a deposit and make monthly payments to cover the loan and interest owed. However, there are a number of alternatives you may want to consider, one of which is an offset mortgage.
Many customers approach us wanting to understand offset mortgage pros and cons, and we often hear questions like “why choose an offset mortgage?”, “Is an offset mortgage a good idea?” and “is an offset mortgage right for me?”
This article will be discussing offset mortgage benefits and drawbacks, and more:
An offset mortgage is when you have a savings account and a mortgage (usually with the same provider), whereby the savings are used to reduce, or “offset”, the amount of interest you pay on your home loan. This means you won’t pay interest on the mortgage debt to the equivalent value of the cash you have in the savings account.
Say you’ve taken out a £200,000 mortgage with an interest rate of 3%, and have £30,000 in a savings account. If you offset these savings against the full loan, you would only be paying interest on £170,000.
As a result and depending on how much you have in offset savings, your mortgage term could potentially be reduced by months or even years. However, it could be argued that these savings could be better utilised if put towards a deposit.
More offset mortgage advantages and disadvantages are discussed below.
What are the advantages of offset mortgages?
So, what are the benefits of offset mortgage accounts, and is an offset mortgage worth it, based on your circumstances?
Historically, offset mortgages have been more popular for buyers with large, stable savings, because offset interest rates tend to be higher. So if you have a very large savings pot, this can often be counteracted by the interest saved by offsetting.
However, more and more lenders are now offering offset mortgages, meaning more competitive rates are available. Here are some of the other potential pros:
An opportunity to reduce the amount of interest you pay
You may be able to repay your mortgage more quickly than with a standard plan.
You can have retained access to your offset savings account if necessary.
Some lenders allow you to offset both ISAs and current accounts as well as savings against your mortgage.
There may be possible tax advantages
What are the disadvantages of offset mortgage accounts?
Offset mortgages are not the most cost-effective solution for everyone, which is why it’s important to speak with a whole of market broker to ensure you get the right mortgage for your needs and circumstances.
Contact us, and one of the specialists we work with will be in touch to determine whether an offset mortgage is right for you. Some disadvantages, which may or may not apply to your situation, include:
A fair number of providers request a loan to value (LTV) ratio of at least 75% before considering you for an offset mortgage.
Interest rates on offset mortgages can be higher than on a standard repayment plan.
Not all lenders offer offset mortgages, so choice may be more limited.
Due to limited lender choice, you may be offered less competitive rates.
It could be more financially beneficial to use cash savings towards a deposit.
Monthly repayments and/or interest rates may increase if you make a withdrawal from an offset savings account.
The linked savings account and mortgage usually have to be with the same provider.
Offset or repayment mortgages?
As covered, an offset mortgage is when you use savings to offset the amount of mortgage interest you’re charged. So, instead of earning interest on your savings, you save paying interest on part of the amount of mortgage loan you still need to repay.
No money is offset with a standard repayment mortgage, meaning that you make monthly repayments to cover the capital borrowed as well as the full interest it accrues. The amount borrowed decreases during the term, and when it ends the loan is paid off.
The pros and cons section above should give you an idea of whether an offset mortgage or a traditional repayment mortgage is the best fit for you.
Other options to consider
If you’re saving with a substantial pot of cash on your side, offsetting this capital against your mortgage may not be the only way you can make it work for you.
The advisors we work with are experts in this field and can discuss all of the available options with you, before recommending the right lender to you.
You might want to discuss the following with them…
Offset mortgage vs shares
Offset mortgage vs other investment opportunities
Make an enquiry and the advisors we work with will go over all of your mortgage and investment options with you.
Other factors to consider with offset mortgages
Offset mortgage and overpayments
Many people opt for offset mortgages because the amount you pay each month will usually be based on the full mortgage value, including the savings amount. This means that you’re effectively overpaying each month, meaning you should theoretically end up paying it off quicker.
However, some lenders will not take the offset savings into consideration when calculating your monthly payments. If this is the case, you won’t end up paying off the mortgage any quicker - so be sure to check with your provider.
As with “standard” home loans, both fixed and standard variable rates (SVR) of interest are available for offset mortgages.
Fixed rate deals tend to be better than SVR (although there is no guarantee), and can last between two to 10 years before you would move onto your lender’s SVR. A handful of providers offer a fixed rate for offset mortgages for the entire term length.
Other individual circumstances
Your affordability, loan to value (LTV), credit history, and even the type of property you’re investing in (to name a few) will all play a key factor as to what rates you’re offered and whether a lender deems you eligible for an offset mortgage.
If you have concerns regarding any of the above and want to know whether an offset mortgage is the best option for you, contact us today and we’ll refer you to an expert specialising in your niche who can advise you in the right direction to go.
Why you should speak to a whole of market offset mortgage broker
We’ve helped over 92,000 people find the right offset mortgage, even those who may have been declined a mortgage or had bad credit history.
In fact, our customers consistently rate us 5 stars on Feefo, mainly due to our high levels of service, but also because we offer offers a 5-star service with access to expert brokers who are:
Whole of market.
Have a working relationship with all offset mortgage lenders, not just a select few.
Already know the offset mortgage lenders to go to as they successfully arrange these already.
Can offer bespoke advice on offset mortgages
OMA Accredited advisors.
Have completed a 12 module LIBF accredited training course.
Talk to an offset mortgage expert today
If you like what you’re reading or require more information, call Online Mortgage Advisor on 0808 189 2301 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 no obligation or marks on your credit rating.
*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.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...