Offsets

The falls in interest rates over the past year may have been good news for borrowers, but savers are losing out. An offset mortgage will effectively allow you to save at the rate of your mortgage (though you won’t receive interest on your actual savings).

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Five Point Plan

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Saving money. The interest you pay on a mortgage is almost always higher than that you receive in savings. So if you reduce the interest you pay in return for forfeiting the interest you earn, you will usually be better off.

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Tax. Most people pay tax on interest earned, but with an offset mortgage you are not earning any interest on your savings, you are paying less interest on your debts so no tax is payable

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Flexibility. Most offset mortgages are flexible, so you may be allowed to overpay, underpay, take payment holidays and so on

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Pots. You can have several different savings accounts depending on your needs – whether they are long or short term – so can plan for different stages of your life.

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There for you. Your savings can reduce your monthly payment, or they can be used to pay off your mortgage earlier by keeping the payments the same as if you had no accounts linked to your mortgage and are therefore overpaying.

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These types of mortgages allow borrowers to literally ‘offset’ the debt of their mortgage against savings that are kept in linked accounts.

The effect is to reduce the interest payable on the debt. For example, if you have a mortgage of £200,000 and savings of £15,000, you only pay interest on the balance of £185,000.

Access
You will always have access to your savings, provided your mortgage is kept in good order. They are always treated as savings, so you can withdraw funds whenever you like without penalty, and without having to ask permission.

If you’re the sort of person who likes to have different savings accounts for different reasons – for example, one account for the long term plans, with another for next year’s holiday – you can have more than one account, or ‘pot’ linked in.

And it doesn’t just have to be savings accounts – some lenders will also allow you to link your current account to the mortgage, so – provided you tend to stay in the black – you could save even more.

Balances
In order to offset against your savings, the balances must be transferred to an accounts held by the offset mortgage lender where they won’t earn
any interest.

However, the interest saved on the debt could make this a worthwhile sacrifice. Furthermore, forfeiting interest payments also means forfeiting the tax payable on them – in which case, offset mortgages are most cost-effective for higher rate taxpayers.

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Flexibility
The flexibility offered by an offset mortgage – which means you can make unlimited overpayments with no early repayment charges at any time and underpay by as much as you have overpaid – can also appeal to borrowers whose income just varies from month to month; for example, if you have your own business or are self-employed. You decide how you want your savings to work with your mortgage.

If you’re just looking to keep the costs down as much as possible, you can request that your lender reduces your monthly payment in line with the amount you have saved.

But many borrowers choose to keep their repayments at the same level as they would be without the savings, which means they are effectively overpaying on their mortgage each month, thus saving on interest and paying off the loan more quickly.

Example
The more you save, the quicker you can pay off your mortgage. Yorkshire Building Society has provided the following example.

If your mortgage was for £150,000 over 25 years at an interest rate of 3.74 per cent your monthly payment is £770.

By saving an extra £50 each month you will pay off the mortgage in 24 years 1 month giving you interest savings of almost £9,000 over the term.

If you save an extra £200 each month you will pay off the mortgage in 22 years and 3 months (interest savings of over £26,000).

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