Offset mortgages are a smart way to invest your money
We describe them and ask if they could be useful to you.
In an effort to lower monthly repayments, many homeowners are thinking about using their savings to overpay on their home loan and pay off a portion of their debt.
Not everyone, though, is willing to give up their savings. In this situation, an offset mortgage could be a lifesaver. With an offset mortgage, you can lower your mortgage interest rate without having to take out a loan by using your savings.
Mark Harris, CEO of mortgage broker SPF Private Clients, states that offset mortgages become more alluring when mortgage rates rise and savings rates aren't always competitive. "Offsets are more expensive than regular deals, but they will eventually drop in line with the overall trend toward lower rates.
"With savings rates also declining, it might make sense to offset any savings against your mortgage rather than putting them in a standalone savings account in an environment where interest rates are declining. This is because the additional benefit of an offset is that your savings work harder to reduce the interest you pay on your mortgage.
What is involved in an offset mortgage?
You open a savings account connected to your mortgage if you receive an offset mortgage. Your savings account balance will be subtracted from your mortgage balance when interest is computed, but the money you deposit there won't earn interest.
As a result, your savings lower your mortgage's interest payment.
You can then choose how to spend the savings with the majority of offset mortgages. You can choose to make smaller monthly mortgage payments or larger monthly repayments, but you will need to use the money you save on interest to shorten the mortgage's total term and pay off your debt sooner.
As an illustration, suppose you have a £250,000 mortgage and £50,000 in savings on a five-year fixed offset mortgage with a 4point 85 percent interest rate. SPF Private Clients calculated that you would save £12,052 in interest if you invested your money in the linked account for five years.
Benefits of an offset loan.
You can save more money on your mortgage interest payments with an offset mortgage than you would with a savings account.
Due to the flexibility of offset mortgages, you can still access your savings in the event that you need to take a withdrawal. Because of this flexibility, you can access your savings without needing to take out a new mortgage in order to raise money.
To maximize your interest savings, you can combine multiple savings accounts, including an ISA, with your offset mortgage; however, each lender has a different policy regarding this.
When you use savings to offset your mortgage, you may also be able to reduce your tax liability. There is no tax due on the interest you save when you use your savings to lower your mortgage interest, even though savings interest is subject to income tax.
If you work for yourself, offset loans may be appealing because you can save money before the self-assessment payment deadline by setting aside funds for tax bills in an offset account.
Negative aspects of an offset mortgage.
Your money won't always be saved by an offset mortgage. For the five years in the example above, I've assumed that you won't need to access any of your savings.
Although you are free to take your money out whenever you want, doing so will result in higher mortgage interest. You might be better off taking out a regular fixed-rate mortgage and investing your money in a high-yielding five-year bond if you know you won't need it for five years.
It is also worthwhile to calculate whether you would be in a different loan-to-value (LTV) bracket if you used some of your savings to pay down your mortgage debt.
Most lenders have a 60 percent LTV threshold, which is the lowest for which the best rates are offered. Therefore, if your LTV was slightly higher than that, you might be better off using your savings to pay off a portion of the mortgage in order to receive a lower interest rate and save a lot more money than you would with an offset mortgage.
London and Country Mortgages' David Hollingworth believes offsets are a good option for people who have savings equal to 510% of their mortgage balance or who receive regular, sizable bonuses but might need access to the funds.
Since most of us have mortgages that are significantly larger than our savings, you should choose a standard loan if you can reduce the interest rate by 0.5 percent or even 1 percent.
Can you use an offset mortgage to make payments and take out savings?
Because offset mortgages are typically fully adjustable, you can take money out and pay it back whenever you need to raise money or have extra cash on hand.
You will be able to lower the amount of interest you must pay on your mortgage debt by increasing your savings.
Your interest costs will increase if you withdraw money.
Each lender has a different method for applying interest charges. Even if you have deposited additional funds into your offset account, certain offset mortgage providers might maintain your monthly payments at the same level. More of your monthly payment in this scenario is used to settle the mortgage balance rather than interest paid to the lender. You can pay off your mortgage more quickly if you do this.
On the other hand, other lenders might decide to compute your mortgage interest on a daily basis and modify payments whenever your savings balance changes.
Can an offset mortgage be overpaid?
An offset mortgage is essentially the same as overpaying. However, an offset is flexible and gives you access to the money used for overpayments, unlike overpaying on a regular mortgage.
The majority of lenders let you offset up to 100%, so there won't be any interest due. The terms of your loan agreement still require you to make monthly payments, but there won't be any interest appliedall of the money will be used to pay off the loan.
You will have to keep making the same monthly payment if your lender requires it. Also, you will not receive interest on any excess savings that exceed 100 percent, so in this case, you would be better off opening an interest-paying account.
How can I tell if an offset is the best option for me?
There isn't a single mortgage solution that works for everyone. Your unique situation and the numbers you are working with will determine whether an offset mortgage is the best choice for you.
An offset mortgage could increase your savings if you have money in a low-interest savings account. But when it comes to savings, we're not talking about little amounts; you need to have a sizable amount of savings in order to justify paying the higher rates associated with an offset deal.
Additionally, an offset loan might not be worthwhile if you anticipate having to take money out of your savings soon.
Another option if you want to pay off your mortgage is to consider overpaying your regular mortgage; just make sure that doing so is permitted by your agreement.
Consult a mortgage broker to determine whether it is the best choice for you. They are knowledgeable about the market and will be able to locate the best and most affordable mortgage offer for you.
Leave a comment on: What is an offset mortgage, and is it something you should think about?