An Offset mortgage allows you to ‘offset’ your savings balance against your mortgage. You only pay interest on the difference between your mortgage and savings balance, giving you the potential to dramatically reduce the interest you pay on your mortgage.
Offset mortgages can be used to either reduce your monthly mortgage payments or more commonly, to reduce the term of the mortgage loan.
Option 1- Reduced Monthly Payment
The term of your mortgage remains the same but your monthly mortgage payment is reduced. The interest you earn each month from the savings in your account is used to reduce the amount of mortgage interest you pay the following month, therefore reducing the monthly mortgage payment. This option allows for more disposable income each month and could save thousands of pounds of interest during the mortgage term.
Option 2 – Reduced Term
Your monthly mortgage repayments stay the same each month but the amount of mortgage interest you need to pay is lower due to your savings balance being offset against it. More of your monthly mortgage payment is used to repay the balance of the mortgage which effectively means you are overpaying your mortgage each month, allowing you the potential to knock years off your mortgage term, save thousands of pounds in interest and potentially repay your mortgage sooner.
Here’s an example: Let’s say your client has a mortgage balance of £100,000 and an Offset savings balance of £20,000. The lender will use their £20,000 Offset savings, and only charge them mortgage interest on £80,000. So, the more they save, the less mortgage interest they pay.
In addition to the above, an offset mortgage offers the ease of having one linked account and instant access to your savings at any time should you need them.
You will not gain any interest on monies held in the offset savings account.