Offset mortgages can be a great way to potentially save interest on your mortgage.
With an Offset mortgage, your savings are used to offset the interest you pay on your mortgage, helping you reduce the time period over which you’re paying your mortgage, or reduce your monthly mortgage repayment, whichever suits you best.
Even small regular savings can help you save money on your mortgage when you’re using Offset.
Offset Mortgages are easy to manage. You can access the savings part of your Offset whenever you want.
Normally, an Offset mortgage is set up just like a standard residential capital and interest repayment mortgage. Other repayment methods may be available.
How do Offset Mortgages work ?
An Offset savings account is linked to your Offset mortgage. Your savings are then used to reduce the amount of mortgage interest you’re charged on your mortgage.
Like a standard repayment mortgage, you must make your monthly repayments. But the bank only charges you interest on the difference between your Offset savings balance and the mortgage amount. The mortgage interest you save is called the ‘Offset benefit’.
You can use your Offset benefit to reduce the overall time period over which your mortgage is to be repaid (mortgage term), or you can elect to reduce your monthly repayment.
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Reduce your mortgage term
You continue to make the full contractual monthly mortgage repayments to your mortgage provider each month. Any monthly repayment is based on a capital and interest mortgage, but other repayment types may be available.
The Offset benefit reduces the outstanding mortgage capital balance, as you see in the example. This in turn reduces the amount of mortgage interest you pay overall. Therefore, your payments shorten the time it takes to pay off your mortgage.
The amount you’ll save, and therefore the actual time that your mortgage term can be reduced, will vary depending on how much money you put into your Offset savings account.
If you choose this option, your monthly mortgage payments are only recalculated following a significant change to your mortgage. For example, if you change your interest rate.
Reduce your monthly repayments
As with reducing your term, you continue to make the full contractual monthly mortgage repayments to your mortgage provider each month. Your monthly repayment is based on a capital and interest mortgage.
At the end of each month, your Offset benefit is automatically used to reduce the amount collected by your mortgage provider in the following month, or the month after that, depending on how early your repayments are in the month.
Your mortgage provider simply does this by reducing the payment amount of your direct debit. (You must pay by Direct Debit if you choose this option).
So, your monthly repayment is reduced by your Offset benefit as soon as practically possible.
You’ll still pay your mortgage for the whole of its original term (the time period your mortgage was taken out for). But, depending on how much money you have in your Offset savings account, you pay less mortgage interest each month.
Important Points to Remember
You must always make monthly capital repayments on the whole mortgage balance.
Any savings in your Offset savings account won’t earn interest because it’s offsetting the interest payable on your mortgage. But it also means that there’s no income tax liability on those savings.
Because you don’t pay interest on your Offset savings account, it doesn’t count towards your Personal Savings Allowance.
How does the Offset Savings Account work ?
Usually you open your Offset savings account when applying for your Offset mortgage.
You can add more money to your savings account whenever you like – more money in your savings account means less interest to pay on your mortgage loan. You can also take money out of your Offset savings account whenever you like.
There’s usually no minimum amount required, so you don’t have to make regular deposits unless you wish to.
Your mortgage provider usually sends you full instructions about how to operate your savings account. They will tell you how to make deposits and withdrawals and, in some cases, you can even set up standing orders to and from your Offset savings account.
More Points to Remember about Offset Mortgages
If you have more money in your Offset savings account, than you have on your Offset mortgage, you will not receive any Offset benefit on the excess amount.
So, if you do ever have more savings in your account, than outstanding on your mortgage, you really should consider moving some of your savings into a different savings account that pays interest.
Where you have the same amount in your Offset savings account as you have outstanding on your mortgage, you still need to make a capital repayment every month.
If you have no money in your Offset account, you will not receive any Offset benefit. With no savings you may wish to review your situation with one of our advisers to make sure an Offset mortgage is still right for you.
The Financial Services Compensation Scheme (FSCS), the UK’s deposit guarantee scheme, protects your eligible deposits with most Offset mortgage and savings account providers up to a total of £85,000. Any deposits you hold above the limit are unlikely to be covered. Ask us for more information or visit www.fscs.org.uk.
Can I still make extra payments to my Offset mortgage ?
Yes, you can make over-payments on your Offset mortgage in several ways. Small ad hoc over-payments, larger lump sum over-payments and regular over-payments (Early Repayment Charges may apply).
But it’s important to remember that if you made an over-payment into your mortgage account you won’t be able to access it again. So, if you think you might need the money in future, you might be better off saving it in your Offset savings account instead. That way, you’ll receive a greater Offset benefit and have access to the money whenever you need it.