OFFSET MORTGAGES
HOW DO OFFSET MORTGAGES WORK?
The bank or building society will open a savings or current account linked to the mortgage where you can put your savings, and the amount in the account will be used to calculate the interest you will pay on your mortgage.
Lenders typically will offer rates for an offset purchase as well as for offset remortgage applications.
You can choose lower monthly mortgage payments, reduce the term of the mortgage or the outstanding balance on your mortgage. The options available will depend on whether you choose a repayment or interest only offset. You can access your savings when you want, however you will not earn interest on them.
You will only be charged interest on the difference between your outstanding mortgage debt and balance in your linked accounts with the lender.
For example, if you have a mortgage of £500,000.00 and have savings of £100,000.00 in a linked savings account, you would only pay interest on £400,000.00. With a standard mortgage your interest payments are based on the outstanding mortgage.
With a repayment offset mortgage, the monthly mortgage payments are still based on the mortgage balance, but the offset benefit reduces the amount you will pay interest on.
Offset Mortgage Rates
Typically an offset rate for a mortgage, tends to be slightly higher than standard mortgage deal and not all lenders will offer offset mortgages. Hence it is always advisable to compare standard repayment mortgages against offset mortgages to see what you could save on the interest payable overall.
You can access an offset calculator online to compare offset mortgage rates against other mortgage deals.
You should compare mortgages available based on property value, loan amount and loan to value ratio, as well as looking at interest payments you would receive on your savings in a standard savings account against the interest rates available on offset and standard mortgage products.
Both offset mortgage and normal mortgage options will have different rate options, although majority of deals available are on a fixed rate.
We can discuss and help you to make the right choice based on your personal circumstances, so you have the right mortgage deal for you.
Accessing savings used for an offset mortgage
You can access the savings you have in the account at any time. If you reduce or take out the full amount you have in the savings account, this will reflect in the amount you will pay interest on your mortgage balance.
Some lenders will allow you to link both your current and savings accounts to your offset mortgage.
You may be required to have a minimum balance in the offset account linked to the mortgage – this will be subject to individual lender criteria and discussed when we look at your options.
REPAYMENT OFFSET
Keys Features
- You can use the Offset benefit to help reduce the mortgage term or reduce your monthly repayments – whichever suits you best.
- You can also switch how you use the Offset benefit whenever you like.
- You always make the full contractual monthly repayments of interest + capital
- You are only charged interest on the difference between your Offset savings account and the amount of your outstanding mortgage – the saving you make is known as the Offset benefit
Reducing the Overall Term of your Mortgage
Any offset benefit reduces the outstanding capital balance which in turn reduces the amount of interest you pay overall. This will reduce the time it will take to pay off your mortgage.
The difference it will make to your mortgage term and overall cost will vary depending on how much money you have in your Offset savings account.
If you choose this option, your monthly payments for your mortgage are only recalculated following a significant change to your mortgage, for example, as a result of a rate change or a capital repayment.
Reducing your monthly mortgage payment
Interest Only Offset Mortgages
With Interest-only offset mortgages, your monthly payments only cover the interest charged and none of the amount you originally borrowed.
You will need to have an acceptable repayment plan in place to pay back outstanding mortgage balance at the end of the term of your mortgage.
With an Interest only Offset mortgage, your savings offset the interest you pay on your mortgage. It’s simple to manage – one Offset savings account is linked to your Interest-only Offset mortgage. The lender will set up the linked account on completion of the mortgage.
To reduce your monthly payments on your Interest Only Offset mortgage:
At the end of each month, any Offset benefit will automatically reduce your monthly repayments on your mortgage by the same amount for the next monthly mortgage payment, or the month after that, depending on when the payment is due.
You’ll still pay your mortgage for the full term, but depending on how much money you have in your Offset account, you pay less mortgage interest each month.
To reduce your outstanding balance on you Interest Only Offset Mortgage:
At the end of each month, any Offset benefit is credited to the outstanding balance owed on your mortgage, thereby reducing the total amount payable by you at the end of your mortgage term. You’ll still pay your mortgage for the full term.
Acceptable repayment plans for an Interest Only Mortgage
Because you only pay back the interest during the term of your mortgage, you’ll still have to pay back the original amount you borrowed when the mortgage term has ended.
You’ll need to have an acceptable repayment plan in place and lenders will ask for evidence of this:
All repayment plans must be on the basis of current value rather than estimated future value. Examples of acceptable repayment plans are:
- The sale of investments
- An endowment policy
- A pension lump sum:
- The sale of the mortgaged property, or another mortgage-free property you own
OVERPAYMENTS ON OFFSET MORTGAGES
You can make overpayments on your Offset mortgage in a number of ways – small ad hoc overpayments, larger lump sum overpayments and regular overpayments.
Early Repayment Charges (ERCs) may apply (your mortgage offer will contain details of the maximum amount of overpayments that are allowed and what if any early repayment charges apply).
Once you have made an overpayment 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.
CLOSING YOUR OFFSET MORTGAGE ACCOUNT
When Offset Mortgages can be beneficial
Generally, if you have some savings and you like the idea of clearing your mortgage early by reducing the term on your mortgage, or use it to reduce your monthly payments, an Offset could be right for you.
Your mortgage advisor will be able to take your individual circumstances into account and give you more information about how you could benefit from an Offset mortgage and further details about how offset mortgages work.
OFFSET MORTGAGES vs STANDARD MORTGAGES
As discussed above, an offset mortgage, offsets the interest paid on your mortgage against the savings you have in the linked account. Therefore the more money you have in the linked account, the lower the mortgage interest will be, meaning you can potentially save quite a lot of money on the mortgage interest you would be otherwise be charged on a standard mortgage product.
It is always advisable to compare mortgages, mortgage deals, and interest rates available on the market (fixed rate, tracker rate, variable rate), and seek professional advice.
There are also a number of mortgage calculators available on line or via your mortgage broker which can help when deciding which option is best suited to your personal circumstances.
BOOK A CALL WITH A MORTGAGE ADVISOR
Speaking to a mortgage broker couldn’t be easier. We always advise speaking to an advisor well in advance. This gives us both an advantage to plan and ensure your mortgage application is correctly processed. It also allows us to plan and help you organise your finances (if need be).
If you would like an informal chat with a mortgage adviser, please use the contact form on our site, drop us an email: enquiries@london-fs.com or give us a call +44(0)208427 5057.
We can run you through what paperwork will be required if you want an offset mortgage, discuss any questions you may have about obtaining a mortgage or you may just want a professional, independent opinion on the property you are buying. In any instance we can help.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme covers individual savings up to a maximum of £85,000.00 including those with offset mortgages. Any excess over the £85,000 will still be offset against the mortgage – by the liquidators acting for the financial institution, not the FSCS.
For example, if you had a mortgage of £250,000 and an offset savings account of £100,000 you will receive £85,000 cash compensation from the FSCS, and the liquidator with use the remaining £15,000 of your balance to reduce the mortgage to £235,000.
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