Offset Mortgages Update

Return of the Offset Mortgage

Offset mortgages are a product that has been around for years but has not always had the uptake it probably deserves. We have recently seen an increased interest in offset mortgages. This is due to the increased mortgage rates in the past 12 months along with the low savings rates that are still being offered by most banks and clients trying to work out alternate ways to get more out of their savings.

How does an Offset mortgage work?

When the new mortgage is set up, a linked savings account is created by the lender. By having savings in your offset savings account, you are only charged the interest on the difference between the amount in your savings and the amount borrowed on the mortgage. For example, with a £100,000 mortgage and £40,000 in the offset savings account, you would only pay interest on £60,000. The more you save, the less interest you will pay on the mortgage. The money in the offset savings account is aways available to you to take funds out if required.

At the end of each year, the lender will contact you to explain how much interest has been saved and options for the coming year for your mortgage because of these savings. Options include reducing the monthly payment so that the term of the mortgage remains the same or keeping the monthly payments the same, with the savings in interest meaning the term of the mortgage is reduced.

Is this the right product for you?

Offset mortgages are offered by a handful of lenders and you will pay a premium for the rates compared to standard products – they are currently around 0.6% – 0.8% higher, so it may not be suitable for everyone. Unless you are using the offset savings account to a certain level you may be better staying with a standard product.

If you already have savings that you can put into an offset savings account and/or plan to set aside regular savings, this product can save you a considerable amount of interest compared to a standard product.  It can also be useful if you are capital raising for certain reasons where the funds may not be used immediately, for example home improvements or purchasing buy to let properties.

All lenders that offer Offset mortgages have calculators which will work out the potential savings you can make and help you understand if it is a product that is suitable for you.

Here at JF Financial Solutions, we use our experience and knowledge to advise which is the most suitable product for your needs. Please contact us and we would be happy to discuss the options available to you.