Spring is approaching, and for many, this time of year signifies a pivotal time to buy or sell your home. I repeatedly hear predictions of a bumper year of house-buying activity, with mortgages a hot topic. Many mortgage advisers overlook the offset mortgage. However, it can be very beneficial for some of our clients. We explain the benefits and downsides of this often-forgotten option.
But first, why are we on the move?
It’s estimated that between 1.5-2 million people will have their fixed-rate mortgages come to an end in 20241, meaning a sharp rise in mortgage outgoings for many. The continuing cost of living crisis could result in some homeowners needing to sell and downsize, thus bringing additional houses to the market. First-time buyer initiatives recently mooted by the government could increase demand for first homes. Add to this the usual catalysts such as changes in state school catchment areas, divorces, deaths, and families simply desiring a change. All of these factors combined could contribute to a busier-than-normal season.
If you fall into any of these scenarios and are thinking of moving house, it’s important to understand all mortgage options and how they may suit you. One often less understood and overlooked mortgage pathway is the offset mortgage.
What is an offset mortgage?
An offset mortgage links your savings and your mortgage. Instead of earning interest, which is mostly taxable, on your cash savings, you ‘offset’ this sum from your mortgage and only pay interest on the remainder. For example, if you held a mortgage of £400,000 but had savings of £50,000, you would pay your mortgage repayment based on £350,000 (£400,000-£50,000).
Who could benefit from an offset mortgage?
1. Those needing flexible access to cash reserves
An offset mortgage may be beneficial if you need flexibility to access your savings. For instance, are you about to undertake a renovation project and need access to cash to pay builders at various points over the next period? You can access your cash at any point as you aren’t paying off the mortgage. You are merely forgoing savings account interest in favour of saving mortgage interest.
2. Self-employed and saving for a future tax bill?
Are you self-employed? Are you setting aside monthly funds to cover next year’s tax bill? Since these funds need to be kept in a secure environment, you may opt to hold them in cash. Given you most likely won’t need to pay the HMRC for the due tax until a year later, in the meantime consider minimising your mortgage payments by linking your tax savings to your mortgage.
3. An opportunity to potentially pay off your mortgage sooner
By maintaining your repayments at the level you would pay without offsetting you might end up overpaying. Consequently, you could pay off your mortgage early and save significant amounts over the loan term. Based on my experience, clients utilising an offset mortgage often repay their mortgage sooner because they are more aware of reducing the outstanding balance.
Things have been a little abnormal, to say the least lately with cash deposit interest rates being more buoyant than usual, while mortgage rates have been even higher. As cash deposit rates normalise in the coming months and years, mortgage rates could also reduce. Still, it would be a rather unusual scenario where cash deposits yield higher interest rates than prevailing mortgage rates for an extended period. I find this outcome unlikely.
What are the downsides of offset mortgages?
- Interest rates can be higher than ordinary mortgages, so you pay more interest on your borrowing. However, the flip side is that when linking your cash savings you will receive a higher rate than average on that sum.
- You will lose out on cash interest on your savings, but as mentioned earlier this will probably be lower than the mortgage rate you are taking.
- There are fewer offset mortgage providers, so your choice will be less.
No one mortgage is right for everyone, despite what your friends may tell you at school pick up or over dinner. It’s important to assess if you need the flexibility offered by an offset mortgage. If not, you may be able to get a cheaper-rate mortgage deal elsewhere.
Medics and dentists often receive preferential lending limits and rates from some lenders. This coupled with an offset mortgage could be a winning combination for your upcoming purchase or remortgage.
For a fully independent, specialist review of the mortgage deals available or to get a better idea of what you can afford to borrow this year, please get in touch, and one of our mortgage team will be happy to help.
Always remember your home may be repossessed if you do not keep up repayments on your mortgage.
Are you looking to move this summer? Why not consider an offset mortgage? Let us know by adding a comment below.