If you are concerned about the cost of rising interest rates and your monthly mortgage repayments – you are not alone. We are all facing high inflation and low returns on our cash deposits, but what if there is a way of making your cash deposits work harder, yet you still retain access to them? Interested? Let me introduce the Offset Mortgage. An Offset Mortgage is an often overlooked mortgage type that can either help reduce the monthly amount you pay on your mortgage or allows you to pay off the loan more quickly if you have cash savings!
When buying a new property or just looking to re-mortgage, you must consider all options. It’s hard to find the right mortgage that does it all, but maybe in these current climates, an Offset Mortgage is just what you need!
Before we explore Offset Mortgages in more detail, let’s look at why property prices have risen and explain why mortgage rates are also on the rise.
The government’s decision to cut stamp duty fuelled the UK property market, which led property prices to soar over the past few years. The stamp duty holiday finished in September 2021. The latest figures from The Land Registry show another year-on-year rise in property prices of 11% up to February 2022. Experts predict house price growth will slow as we move through 2022, but there is still an anticipated rise of up to 3.5% this year, followed by a further 3% increase in 2023.
With the Bank of England’s base rate increasing to 1%, there has also been a rise in mortgage rates, meaning the monthly repayments for a mortgage on your dream home are also increasing. With mortgage rates on the increase, an Offset Mortgage could work for you.
So how do Offset Mortgages work?
If you have cash savings held in a bank account linked to your mortgage the bank deducts those savings from the mortgage you pay interest on, giving you the option to pay less each month if you have money in the bank, or maintain the original payments and pay off the mortgage faster, hence, saving you thousands of pounds over the course of the mortgage term.
For example, if you have a mortgage of £250,000 and have £50,000 in a savings account linked to the offset mortgage, you would only pay interest on the residual balance of £200,000. In contrast with a standard capital repayment mortgage, the interest payments are calculated against the total amount you owe.
Can I access my money if I need it?
Another big advantage of an Offset Mortgage is the flexibility you have to access the money you have saved in the account should you need it.
The Pandemic has taught us that we need to cherish the important things in life and treat ourselves from time to time. Therefore, if you want to go on a luxury holiday, purchase a new car, repair or improve your home, then you can access the capital needed far easier. Providing you meet your lenders’ minimum balance requirement your money in the linked account can be utilised at no penalty. Going back to our earlier example, this means if you accessed £10,000 of the £50,000 saved, you would then look to pay interest on the balance of £210,000, rather than the £200,000 figure.
Many people see this type of mortgage as a better option than simply overpaying on their mortgage because it ensures money is readily available. Of course, you could make overpayments, but accessing this money at a later date if you need it would take an additional borrowing application, which can be time-consuming and costly with application fees. Overall, a trickier business!
Important things to consider
While the flexibility and benefits of an offset mortgage are clear, there are some important notes to be aware of when applying for an Offset Mortgage:
- Your repayments will continue to be based on the full loan amount. The offset arrangement simply reduces the amount you need to pay interest on, not the loan itself, which still needs to be repaid in full.
- You do not receive any interest on your linked savings account. However, with the current interest rates offered on cash savings being very low, the amount you will save either by reducing your monthly repayments or by paying off the loan faster will typically outstrip what is saved in a normal savings account.
- As a rule, the interest you are charged on an Offset Mortgage is higher than that of a standard capital repayment mortgage. This means if you are unlikely to have a substantial cash balance in the savings account, or are not in a position to leave it untouched, then its effectiveness is likely to be reduced.
- The number of lenders that offer Offset Mortgages are limited, so there may not be a great deal of choice in the rates that are available.
Offset Mortgages allow you to take control of your finances, whether you intend to clear your mortgage debt sooner or to reduce your monthly outgoings. However, they are not the right choice for everyone.
Whether you are searching for a new property or having a mortgage rate coming to an end, we recommend you seek advice. Our advisers are independent and not tied to any particular mortgage company, so when looking for a mortgage that suits you and your finances, you can be assured you will receive the best possible deal.
Always remember your home may be repossessed if you do not keep up repayments on your mortgage.
Do you have an offset mortgage? Do you like the flexibility? Let us know by leaving a comment below