With high mortgage rates continuing to be a factor in the housing market, many homeowners are facing a big hike in mortgage repayments when their current mortgage deal ends. As a result, many homeowners are considering using their savings to overpay on their mortgage – paying off some of their debt to try and reduce their monthly repayments.
However, if you are worried about the high cost of living you may not want to part with your savings. This is where an offset mortgage may offer a lifeline. Offset mortgages give you the opportunity to use your savings to reduce the amount of interest you pay on your mortgage – without having to part with your money.
How do offset mortgages work?
If you get an offset mortgage you open a savings account that is linked to your mortgage. Money that you put in the savings account won’t earn interest, but the balance will be deducted from what you owe on your mortgage when the interest for your debt is calculated. So, your savings reduce the interest owed on your mortgage.
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With most offset mortgages you then have a choice on how you use those savings. You could opt to reduce your mortgage payments each month, or you could opt for higher monthly repayments, but use what you are saving in interest payments to shorten the overall term of your mortgage – meaning you clear your debt sooner.
For example, let’s say you have a £250,000 mortgage, and £50,000 in savings on a five-year fixed offset mortgage at a rate of 3.35%. If you put your savings in the linked account over five years you would save £8,166 in interest.
Why an offset mortgage may not be right for you
An offset mortgage won’t always save you money. In the above example, I’ve assumed that you don’t need to access any of your savings for the full five years.
You can withdraw your money whenever you like, but when you do, you’ll pay more interest on your mortgage. If you know you won’t need your money for five years, you might be better off going for a standard fixed-rate mortgage and putting your savings into a top-paying five-year bond.
It is also worth running the sums to see if using some of your savings to reduce your mortgage debt would put you into a different loan-to-value (LTV) bracket.
For example, in the above example if the homeowner opted for an offset mortgage – assuming their home is worth £450,000 – they would have an LTV of 56%. However, if they used some of their savings to reduce their mortgage debt to £225,000, their LTV would shift to 50% potentially opening up lower interest-rate mortgage deals. This could save far more than an offset mortgage would.
David Hollingworth of London & Country Mortgages reckons offsets make sense for those with 5%-10% of their mortgage balance in savings or those who receive regular large bonuses but may need access to the money.
"Because most of us have a much bigger mortgage than savings balance if you can knock 0.5% or even 1% off the interest rate by choosing a standard loan, you should."
Whether an offset mortgage is the best option for you depends entirely on your own personal circumstances and the figures you are dealing with.
The best way to work out if it is the right option for you is to speak to a mortgage broker. They are experts in the market and will be able to find you the cheapest possible mortgage deal.
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