Why You Should Consider An Offset Mortgage
Offset mortgages are one of the lending industry's best kept secrets, but they don't work for everyone. Could an offset mortgage be right for you?
Offset mortgages have been around for a number of years now, but take-up has been slow. They can be seen as being rather complicated (although really, they are not), not all lenders offer them (which reduces the options available), and those which do provide them don't tend to spend much time or money in marketing them (hence they are a well-kept secret).
Although they vary a bit from lender to lender, the basic underlying principle is simple. Take out a mortgage, and at the same time open a linked savings account. You only pay interest on the net difference, so for example if your mortgage is £100,000 and you have savings of £25,000 then you are only charged interest on the £75,000 difference. Over time, this could potentially save you thousands of pounds in interest, and could result in you being able to repay your mortgage several years early.
You won't receive any interest on the savings you hold, but instead gain benefit from a reduced interest bill on the mortgage. This makes it tax efficient, as you might otherwise have had to pay tax on the savings interest. If you are a higher rate tax payer, then it is potentially even more tax-efficient.
So, who doesn't it work for? Well the main group that offset won't work for is those who have little or no savings (and no likelihood of having any in the near future). Interest rates on offset mortgages do tend to be higher than for comparable non-offset mortgages (although the difference is fairly small), so there is little point in having one unless you are going to use the main feature - the ability to reduce the interest cost through the offsetting of savings.
For those with savings, the benefits can be substantial. Offset works particularly well for those with decent levels of long-term savings but who wants to keep it as savings rather than pay it off the mortgage as a permanent reduction. It also works well for those who are saving up for a big expenditure item such as a car; the money can be made to work hard until needed, but then is easily accessible at that point.
Offset is also a brilliant concept for the self-employed, who must save up for their tax bill which falls due once or twice a year. Clearly, they can't pay that money off their mortgage as a permanent reduction as they will need it in a few months-time. They can however put it in their offset savings account until it is needed, and will get the full benefit of the interest reduction in the meantime. It also allows the money to be ring-fenced to avoid it being kept in their current account, where it might get spent!
Another example would be someone who has a property portfolio. Sensible landlords ensure that they have savings to cover the unexpected: a broken boiler; a tenant in arrears; an empty property; a property needing a make-over. Those savings are probably not needed very often though, and keeping it in an offset savings account linked to their home mortgage is a good way of ensuring that there is ongoing benefit until it is needed.
The lenders who provide offset mortgages recognise that once an offset is taken out, the borrower is likely to keep it with them for a longer duration than a conventional mortgage, and work hard to ensure that the product works well. Whilst the numbers of offset mortgage products are relatively low, it is possible to get all of the usual options: fixed, tracker and discounted rates are available and they can be taken over a range of time-frames.
If you think that an offset mortgage might work for you, or would just like to understand more about them, then contact us at Maxwell Moore, and we will be delighted to talk through the detail with you.