If you’re lucky enough to have a decent savings pot and want to reduce the cost of your monthly outgoings, an offset mortgage could be worth considering.
OnTheMarket talks you through a type of mortgage with which many consumers may not be familiar.
Offset mortgages explained
As the name suggests, this type of mortgage allows you to ‘offset’ any savings you have against the amount you owe on your mortgage, so you only pay interest on the amount that’s left.
Your savings and mortgage will therefore be held with the same provider. You can still access your savings whenever you want, but the more you’re able to offset, the bigger the impact this will have on your mortgage costs.
For example, if you’ve got a £150,000 mortgage and £40,000 in savings, offsetting this cash against your mortgage would mean you only pay interest on £110,000.
If you’re able to offset £70,000 in savings, then you’d only pay interest on £80,000. It’s up to you whether you reduce your monthly mortgage payments or keep them at the same level and pay off your mortgage sooner.
The benefits and drawbacks of offset mortgages
The Bank of England voted unanimously to leave interest rates at a record low of 0.1 per cent in May. Savings rates have plummeted in recent weeks, with only a small number paying returns that keep pace with inflation, or the rising cost of living.
Although you won’t earn any interest on your savings if you offset them against your mortgage, as mortgage rates are typically higher than savings rates, you should get a better effective rate of return.
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Eleanor Williams, spokesman for financial information website Moneyfacts.co.uk said: “Once on the property ladder, the main aim for many is to pay their mortgage balance off as quickly as possible.
“As a general rule, if a borrowers mortgage rate is higher than the interest rate they are currently earning on their savings, then they may find that they can save more by repaying their mortgage than they would receive in savings interest, particularly if they pay tax on the latter.”
Offset mortgage rates now more competitive
Bear in mind that offset mortgage rates are usually higher than standard mortgage rates, although they have become increasingly competitive in recent months.
According to Moneyfacts, the average two-year fixed rate on an offset mortgage has fallen from 2.10 per cent in April 2019 to 1.90 per cent today, while the average five-year fixed rate has fallen from 2.35 per cent to 1.96 per cent.
However, the number of offset mortgages available has dwindled over the past year, so the range of options on offer won’t be as wide as for standard mortgages. There are currently 95 offset mortgages available, down from 210 in April 2019.
It can be difficult to work out whether an offset mortgage will be more cost-effective than a standard mortgage, as it will depend on your savings balance and the returns you’re currently earning, as well as the offset mortgage rate.
If you’re not sure, it’s a good idea to seek professional advice on which mortgage option is likely to be best for you.
