An offset mortgage is a type of mortgage where your mortgage is combined with savings in your current account. Usually it involves holding a current account and mortgage with the same financial institution. The way it works is that savings from your current account are used to reduce the value of your mortgage payments.
For example if you had a mortgage for £150,000 and savings of £30,000 in your current account. Then when calculating your monthly interest payments you would pay interest on £120,000. If you needed to spend £10,000. Then in the next month you would pay interest on £130,000
Advantages of Offset Mortgages
- Benefits those who can save money. Less mortgage payments
- Allows flexibility
- Usually interest on savings attracts a tax penalty. However if your savings are automatically used to offset your mortgage you will not pay any tax from these savings. If you pay tax on savings at the higher rate you can save a lot. This is because your savings are automatically used to offset the mortgage.
- The interest on a mortgage is usually higher than a current account so this is another advantage. For example often a current account may only give you 1% interest, however the interest on a mortgage may be 6%. Therefore it is more efficient to use the money to reduce payments on your mortgage than it is to keep it in a low interest saving account.
Disadvantages of Offset Mortgages
- It can be tempting to consolidate a lot of debt into one place. However in the long run this can lead to higher interest payments.
- Most offset mortgages allow the borrower a certain credit limit in the beginning. If you are not disciplined about paying this back then at the end of your mortgage period you can be left with a big loan to pay.
- As with all mortgages worth check all small prints about tie ins and relative rates of interest.