Home-owners can cut the cost of their debt by using their savings to get an offset mortgage deal.
The offset mortgage sector has seen a resurgence in recent years with UK lenders launching new deals.
What is an Offset Mortgage?
Offset mortgages allow you to tie a savings account to your mortgage debt. Your bank will use the savings amount to reduce the total interest you pay on your mortgage.
For example, if you have £30,000 in savings and a £300,000 mortgage, you will only have to pay interest on £270,000, reducing how much interest you pay overall.
Offset mortgages are a type of interest-only mortgage which means you only pay the interest and at the end of the mortgage term, you will still owe the same amount you initially borrowed.
By offsetting the mortgage, your monthly payment will remain the same but because the amount of interest you owe has been reduced, you will pay off the total interest in less time.
Benefits of an Offset Mortgage
An offset mortgage is an attractive option for borrowers because the savings rate is currently low so money in the bank isn’t working very hard for its customers.
Whereas, using the savings for an offset mortgage can offer excellent value to homeowners.
As your savings are not actually used to reduce the mortgage balance, they will still be in place at the end of the term and can be accessed at any time.
You can also add to the savings or link several saving accounts. Interest is calculated daily so will be adjusted and recalculated the next day, taking into account the new savings balance.
Offset mortgages can help first-time buyers get on the property ladder by linking to parents’ or other relatives’ savings accounts.
What to Consider
Be aware that your savings will not grow when they are linked to an offset mortgage so consider this if you rely on an income from your savings.
Offset mortgages do tend to be more expensive than traditional mortgages, as you are paying extra for the flexibility. You would, therefore, need to work out the minimum savings amount required to make up for the difference in mortgage rates.
Overall, offset mortgages are worth considering if you have savings that aren’t earning you much money in interest. Use an offset mortgage calculator to work out if it is a viable option for you.