Offset Mortgage

Offset mortgages are a feature offered on some fixed rate mortgages which allow borrowers to pay interest on a reduced amount. Offset mortgage customers are required to set up a savings account with the new mortgage lender. Mortgage interest is then only charged on the difference between the mortgage balance and the savings balance.

As an example, a borrower with a £250,000 mortgage and £50,000 savings would only pay interest on £200,000. Sounds good right? Well, the reason offset mortgages are not common and often not appropriate is that the interest charged on an offset mortgage is higher than on a comparable, regular fixed rate mortgage. Therefore, borrowers need a significant amount in savings to make an offset mortgage the most cost-effective option. The proportion of funds needed in savings to make the offset worthwhile depends on the difference in interest rates between a regular fixed rate and the offset rate. This can be simply calculated when needed!

Once the offset mortgage is set-up, borrowers can benefit in one of two ways. Firstly, you can benefit purely from the reduced monthly payment brought about by having savings offsetting the mortgage balance. Secondly, and typically the most popular choice, is to use the offset to reduce the mortgage term and get the mortgage paid off faster. The original monthly payment is maintained. However, as the offset balance is reduced, the interest charged is reduced and therefore any additional contribution represents an overpayment on the mortgage which directly reduces the mortgage balance outstanding.

Business owners, specifically limited company directors, with surplus funds accumulated in the business can and do utilise offset mortgages to great effect. A director’s loan can be taken out of the business and placed in the offset savings account. Now advice should be sought from your accountant regarding the logistics and when money would need to be returned to the business to prevent any tax liability. However, as interest on mortgages is calculated daily, you would only be charged an increased amount of interest for the days when the money was back in the business account. This needn’t be more than one or two days a year. If you’re a business owner with surplus cash you don’t draw out due high tax bands, an offset mortgage could be a way to utilise money sitting in your business.

Offset mortgages are offered by very few lenders across the market. They typically require a minimum 15% deposit and are available on both a repayment and an interest-only basis. Offset mortgages can be a fantastic option for the right customer. If you think an offset mortgage could be suitable for you or want to know more about them, please get in touch! For all mortgage and life insurance queries, we’re here to help with free, professional advice.