FREE Offset Mortgage Advice
“We know that time is precious for you, we can work around your availability while searching for the most competitive mortgage products and overseeing your mortgage application from start to finish”.
Jonathan Smith – (CeMAP, BA Hons, Aff SWW, CeRER)
If you have some savings put aside and are considering your mortgage or remortgage options, it can be beneficial to look into an offset mortgage. This flexible type of mortgage can help you make considerable savings by reducing the amount you pay in interest each month or shortening your mortgage term.
At Trinity Finance, our mortgage brokers can discuss your situation and the types of offset mortgages available to ascertain whether this is the best mortgage solution for you and the potential savings you stand to make.
What is an offset mortgage?
With an offset mortgage, your savings account is linked to your mortgage. These savings are then offset against the value of your mortgage and you only pay interest on the balance. This reduces the amount of interest you pay each month compared with a standard mortgage where the interest is charged on the entire mortgage loan. For example, if you have a mortgage of £300,000 and savings of £20,000, interest is only payable on the balance of £280,000.
How does an offset mortgage work?
Your linked savings account is usually held by your lender. These funds aren’t used to repay any of the actual mortgage loan, they are only offset against the loan’s value to reduce the balance that interest is charged on.
Choose your preferred benefit
As mentioned earlier, this type of mortgage is flexible. You can choose whether you prefer to pay less interest each month or whether to keep your monthly payments the same but shorten your mortgage term. The first option is appealing as you benefit from lower monthly payments but the second option means you can look forward to being mortgage-free sooner and you’ll pay less interest over the course of the shorter term.
Your savings account
You can access your savings whenever you need to. Just bear in mind that any amount you withdraw won’t be offset against your mortgage loan so your interest payments will increase. Using the earlier example, your initial £20,000 savings would be offset against your £300,000 mortgage loan so that interest is only charged on £280,000. However, if you withdraw £5,000 from your savings, only £15,000 is offset against your mortgage loan. Interest then becomes payable on the higher balance of £285,000. It’s important to note that some lenders have a minimum requirement for your savings balance so you must be careful to check this when making withdrawals. Our mortgage brokers will check each lender’s requirements and ensure you’re aware of any minimum balance before you make a decision on your preferred mortgage product.
You can also pay more into your savings account and increase the pot that is offset against your mortgage. The more funds you add, the less interest you’ll pay and the more you’ll save in the long run.
You won’t receive any interest on your savings but you won’t be taxed on them either. As a higher rate or additional rate taxpayer, this can be very beneficial. Interest rates on normal savings accounts are currently low. The amount you stand to save on your mortgage interest payments should far outweigh what you would earn in interest via a standard savings account.
Make overpayments
Many lenders allow overpayments to be made, which are payments to reduce the actual mortgage loan. The allowance tends to be up to 10% per year without incurring an early repayment charge. This not only reduces your mortgage balance and, in turn, the mortgage term but also the subsequent interest charged on it. The downside to making overpayments is that you cannot access that money again. If you paid the funds into your savings account instead, it would be offset against the balance to benefit from lower interest charges and you could access it when needed
Help a loved one with a family offset mortgage
Some lenders allow family members to use their savings to offset a loved one’s mortgage and this arrangement is usually used by parents. As a parent, you can link your savings account to your child’s mortgage, helping to reduce the interest payments that become payable. As the interest payments will be lower, your child has a better chance of passing the lender’s affordability checks so a family offset mortgage is a good way to help your child get on the property ladder.
What types of offset mortgages can you choose from?
Just like standard mortgages, you can choose between fixed and variable rates for offset mortgages. The interest rates for these mortgages tend to be higher because of the flexibility they offer but the savings you can make with this type of arrangement should more than compensate for this.
- Fixed rate offset mortgage: The interest rate for this type of mortgage is fixed for a set period, such as 2, 3 or 5 years. This is good for budgeting as you know what rate will be charged on the offset amount throughout the fixed term. It also gives you peace of mind that your rate won’t increase if the base rate increases.
- Standard variable rate (SVR) offset mortgage: This rate is set and adjusted by the lender. It is usually higher than other rates but the advantage is that you can switch to a new deal with your lender at any time without incurring an early repayment charge.
- Discount offset mortgage: This provides you with a discount on the lender’s SVR for a set term. When this term has ended, the rate reverts to the lender’s SVR.
- Tracker offset mortgage: This type of mortgage has a variable rate and tracks a particular rate, such as the base rate set by the Bank of England. As the base rate goes up and down, so does the interest rate you have to pay for your offset mortgage.
As well as choosing between fixed and variable rates, there are other types of offset mortgages to consider:
- Interest-only offset mortgage: With this arrangement, you only repay the interest owed on the loan each month — none of the capital is repaid. This means you have to find additional funds or sell your property to repay the loan at the end of the term.
- Family offset mortgage: As mentioned above, you can help out a family member using this type of mortgage. Your savings will be linked to their offset mortgage so that their monthly interest payments are lower. These reduced payments can make it easier for them to pass the affordability checks carried out by the lender so this arrangement can help your loved one to get on the property ladder.
Our mortgage brokers, located throughout Kent, London and Edinburgh, are available to discuss the comprehensive details of offset mortgages with you. Taking your circumstances and requirements into account, they can help you decide which type is the best to opt for and whether it’s more beneficial to pay lower monthly amounts or shorten your mortgage term. Just give us a call on 01322 907 000 to find out how an offset mortgage compares with a standard one for your needs. Alternatively, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form and we will respond to you as quickly as possible.
Should you pay a bigger deposit instead?
The more deposit you pay, the less you need to borrow for your mortgage, which is called the loan-to-value (LTV) ratio. When you opt for a lower LTV, lenders will offer you better deals that have lower rates. However, if you pay this money into a savings account that’s linked to your offset mortgage, you can benefit from lower interest payments on the offset mortgage balance each month. You can also access your savings in the future should you need them. Our mortgage brokers can help ascertain which option is best for you depending on the amount of savings you have and the deals available.
The pros and cons of offset mortgages
There are many benefits as well as drawbacks to consider when thinking about applying for an offset mortgage. As with any mortgage, whether this type is right for you depends on your situation and requirements, such as preferring flexible terms and needing access to your savings.
Advantages
- You can benefit from reduced interest charges, giving you the flexibility to either make lower monthly payments or shorten your mortgage term.
- You can make bigger savings than if you left your funds in a normal savings account. The amount you can save in reduced interest charges on your mortgage should far outweigh what you’d earn in interest on your savings with the current low rates.
- You won’t pay tax on your savings, which can be a tax-efficient option if you’re a higher rate or additional rate taxpayer.
- You can access your savings to withdraw funds if needed.
- You can add funds to your savings account, increasing the amount that can be offset against your mortgage.
- You can usually make overpayments, allowing you to become mortgage-free sooner.
- Some lenders allow you to link additional accounts, such as your current account.
- You can help your child to get on the property ladder with a family offset mortgage.
Disadvantages
- The interest rates tend to be higher than those for standard mortgages due to their flexibility.
- You won’t earn interest on your savings.
- If you withdraw funds from your savings account, the amount to be offset against your mortgage is decreased, which increases the interest to be paid.
- If your lender requires a minimum balance to be kept in your savings account, you won’t be able to access all of your savings if you need them.
- Fewer lenders offer offset mortgages so you won’t have as many options available compared with standard mortgages.
- Lenders often require a higher deposit of at least 25% for offset mortgages.
- It may be more beneficial to use your savings as a bigger deposit to reduce your LTV and benefit from lower rates.
Is an offset mortgage right for you?
Whilst there are many benefits to having an offset mortgage, this type of arrangement doesn’t suit everyone. It really depends on your circumstances, the size of the loan you require, the amount of savings you have, the flexibility you seek and the mortgage deals available.
If you have substantial savings and want to put them to work so that you can either pay less interest each month or shorten your mortgage term, then an offset mortgage is advantageous. An offset mortgage also encourages saving and you’ll stand to make higher savings from the reduced interest payments on your mortgage than you would make in earnings from the interest on your funds if you left them in a normal savings account.
If you’re likely to be tempted with the easy access to your savings, however, this might not be the best option for you. Should you wish to keep withdrawing funds, you’ll gradually reduce the amount to be offset against your mortgage and increase the amount that interest becomes payable on. As the interest rates are higher for offset mortgages, you’ll end up paying more overall than with a standard mortgage.
You may have an irregular income and receive payments in lump sums or bonuses. In this case, an offset mortgage is beneficial as these payments can be transferred into your linked savings account to increase the amount that’s offset against your mortgage.
If you’re a higher rate or additional rate taxpayer, an offset mortgage is tax-efficient. Your Personal Savings Allowance (PSA) as a higher rate taxpayer allows you to benefit from tax-free earnings of up to £500 in interest on your normal savings. If you’re an additional rate taxpayer, a PSA doesn’t apply to you so you won’t enjoy any tax benefits with standard savings. The savings linked to your offset mortgage, however, won’t earn any interest and so you won’t have to pay tax on them at all.
What alternatives are available?
As we mentioned earlier, most lenders allow overpayments to be made. These are usually restricted to 10% of the mortgage balance each year without having to pay an early repayment charge. An alternative to consider is a mortgage product with the facility to overpay more than the standard 10%. This will allow you to repay your mortgage loan sooner. The interest rate will likely be lower than the rate for an offset mortgage too, helping you to save more overall. Just bear in mind that the funds used to make overpayments can’t be accessed again, unlike the funds placed into a savings account that’s linked to an offset mortgage.
You may also have access to deals with much lower rates if you use your savings for a bigger deposit. Depending on the deals available, a lower LTV may be more beneficial to you, especially if you have enough deposit to reach the next LTV threshold. For example, you’ll have access to a lot more deals with much lower rates if your savings reduce the LTV from the 75% threshold (with a 25% deposit) to the 60% threshold (with a 40% deposit).
We can help you benefit from a flexible offset mortgage
At Trinity Finance, we work closely with lenders offering offset mortgages. Our mortgage brokers – located throughout Kent, London and Edinburgh – will check the deals available whether you’re looking to purchase or remortgage with the benefit of offsetting. They’ll ascertain whether there’s a minimum savings requirement, the ease with which you can withdraw your money, how many accounts you can link to your mortgage and whether there’s an overpayment option without being penalised. They’ll also compare the rates, taking into account whether you prefer a fixed or variable option, and the fees involved. Offering bespoke advice, our mortgage brokers can also help if you need an offset mortgage from a specialist lender. For example, you may have irregular income and expenditure if you’re self-employed, you may have bad credit or you may be searching for an offset mortgage for a buy-to-let investment.
Whatever your circumstances, our mortgage and protection consultants will compare the offset mortgage deals with the standard mortgage deals available to determine the savings you can make with each, the flexibility of the terms and the optimum suitability for your situation. To get started with your search, simply give us a call on 01322 907 000 or send us an email at info@trinityfinance.co.uk. If it’s out of office hours, send an enquiry to us via our contact form and one of our mortgage specialists will reply to you as quickly as possible with more information
What our clients say
