Are Offset Mortgages a Good Idea

Are Offset Mortgages A Good Idea For You

If you’re looking to clear your mortgage early and get the equivalent tax free savings, a mortgage offset account may appeal to you. An offset account ideally links your current account, savings, and your mortgage, allowing you to get a tax efficient return for your next egg, pay less interest, and pay off your mortgage much quicker. You can potentially save thousands of pounds in the process. But are offset mortgages a good idea?

How Does an Offset Mortgage Account Work?
The model behind offset mortgages is rather straightforward. It involves balancing your current account and your savings against the mortgage, and then paying interest for the difference. For example, if you have a mortgage of £150,000 and only £50,000 in savings, you would have to pay interest only on the £100,000. Tips On How To Get A Mortgage With Bad Credit But Good Income

You first put down equity of a deposit, just as you would in a typical mortgage or re-mortgage, and then contribute some extra savings to reduce the interest charged. To benefit from this, you will need to forego the interest earned on your savings as you would earn in a normal savings account. But the money will be working for you in that it reduces the amount of interest you’ll pay for the mortgage.

In most cases, you still need to make your monthly contributions based on the full amount of debt, meaning that you can pay down the mortgage more quickly than you otherwise would have. The rates are generally higher compared to the conventional mortgages, but if you have a large savings balance, the offsetting can cancel out the interest.

How Does This Help to Clear Your Mortgage Quicker?
Well, your mortgage repayments generally go towards two things: paying the interest earned on the debt, and paying the debt. The payments ideally pay off both using equivalent monthly repayments over a given period.

Reducing the interest charged means that much of the monthly repayments ideally go towards loan repayment, which helps to clear the mortgage much quicker. The benefit of this is that you don’t have to spend a huge portion of tour monthly income on the mortgage, and that you’ll save a considerable amount when the payments are over.

For example, if you have a 25-year, £150,000 mortgage with a rate of 3.5% and you currently set £30,000 in savings against your loan and have an average current account balance of £1,000 monthly, it means you could clear your mortgage in 3 years and 9 months earlier than you otherwise would have. This will translate into saving 45 months’ worth of mortgage repayments at £750 and a total of £33,750.

So, are offset mortgages a good idea?
Offset mortgages are generally suitable for buyers with a large, stable savings account. So, there’s usually no point of signing up for an offset mortgage if you don’t have any, or much savings. It will only cost you a higher mortgage rate unnecessarily.

Also keep in mind that rates under offset mortgages tend to be higher than the normal mortgages, at an average of about 0.2% points. Compared to some of the best-buy fixed rates, the gap could reach 0.4% to 0.5% points. Plus, offsetting will mean that your savings will not be earning interest the conventional way. There’s also lesser options available in the offset market, and it might be difficult to find the most suitable terms for you.

In that case, offset mortgages would be worth considering if you have sizeable savings that you need access to from time to time. But you need to weigh up the added costs carefully, as well as the loss of interest and the amounts in tax saved.

May 2, 2018


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