Five-minute guide to... offset mortgages
What is an offset mortgage?
An offset mortgage uses any savings you hold with the same bank to bring down the interest payments on your mortgage.
However, it's not just the money in your savings account that you can use to offset your mortgage: some lenders will take into account the money in your current account as well (even when it's held with them).
Is it right for me?
An offset mortgage will only work if you have substantial savings to pay in - usually at least 10% of the value of your property. If you have less, then this sort of mortgage won't be worth your while.
An offset mortgage is great if you're self-employed and receive a sporadic income. It means you can use the overpayment facility when you have cash to spare, and pay less when you don't.
What are the typical rates for offset mortgages?
This is available as a normal or an offset mortgage; the former has a £1,499 fee, the latter a £999 fee. Check out our mortgage round-up for the best rates.
How much can I save by using an offset mortgage?
The amount you can save depends upon on the value of your savings.
For example, if you have a £200,000 mortgage and £50,000 in savings, you will only pay interest on the difference - in this case, £150,000.
According to Melanie Bien, director of independent mortgage broker Private Finance, with a rate of 4.5%, this would equate to knocking five years and six months off a 25-year term. Alternatively, you could reduce your monthly payments by £188 to £924 a month.
Can I still access my savings?
An offset mortgage is an extremely flexible way of borrowing: it allows you to access your savings whenever you need to, but at the same time any remaining savings will continue working to reduce the interest on your mortgage.
Are there any downsides I should be wary of?
The main disadvantage of an offset mortgage is that your savings will not garner any interest. In the current super-low interest-rate environment, that should not be a problem.
However, on the chance that interest rates may rise significantly in the future, you may prefer to keep your savings in a high-interest savings account instead.
Help! I need to use my savings, do I have to change mortgage?
If you have an offset mortgage but have to use all your savings, you don't have to change your mortgage. Your offset mortgage will sit alongside your savings, and since rates aren't all that different between offset and non-offset mortgages, it may be worth just staying put and attempting to build up your savings again.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.