The basic idea behind an offset mortgage is that your savings account and your mortgage are both combined into the same account so that any savings you have can count as temporary overpayments towards the repayment of your debt.
The key benefit is that you still have access to your savings so you can spend them if you need to. This is of course not the case when you make conventional overpayments on your mortgage as the money used to do so goes directly to the lender, never to be returned to you.
Having an offset mortgage allows you to make great savings when it comes to interest.
If you have a mortgage worth £150,000, and have £20,000 in a savings account, then with those savings offset against the mortgage value, you’d only be paying interest on the £130,000 difference.
The savings you’d make on interest will, in general, be greater than the interest you’d earn if you simply left your money in a conventional savings account. You also avoid paying the 20-25% tax on your savings, since the mortgage repayment interest deductions you enjoy are not going to be taxed.
So by offsetting your lump sum savings against your mortgage and making regular deposits into the account, you could save yourself thousands of pounds in interest throughout the course of your mortgage.
While the savings you’d make by offsetting your savings against your mortgage can be drastic, this fact is taken into account when the mortgage providers actually calculate the rates offered on these kinds of loans.
Offset mortgages tend to have higher interest rates than those attached to conventional mortgage plans, but with the right amount of savings, you should still end up saving quite a lot of money.
There are various offset mortgage calculators available online that you can use to work out exactly how much you’d save, but by talking to one of our mortgage specialists you’ll be able to work out whether or not it’s the right move for you. It all depends on the size of your savings and how much you’re regularly depositing, as well as of course on the size of the mortgage to begin with.