If you’re a homeowner, you’ve probably heard about different types of mortgages such as fixed-rate, variable-rate, and interest-only mortgages.

However, another type of mortgage that can be very helpful is what’s known as an offset mortgage. In this blog, we’ll discuss what an offset mortgage is and the benefits it offers to residential homeowners.

What is an Offset Mortgage?

An offset mortgage is a type of mortgage that links your savings and current account balances to your mortgage debt.

The idea behind an offset mortgage is that the interest you earn on your savings and current accounts is used to offset the interest you pay on your mortgage.

For example, if you have a mortgage of £200,000 and savings of £50,000, you’ll only pay interest on the net balance of £150,000.

How Does an Offset Mortgage Work?

With an offset mortgage, you’ll have a savings account and a current account with the same bank or lender that provides your mortgage.

These accounts are linked to your mortgage account, and the balances in your savings and current accounts are offset against your mortgage debt. As a result, you’ll only pay interest on the difference between your mortgage balance and your savings and current account balances.

For example, let’s say you have a mortgage of £300,000 and £50,000 in savings and current accounts. In this case, you’ll only pay interest on £250,000 (£300,000 – £50,000).

If you deposit more money into your savings and current accounts, the interest charged on your mortgage will reduce further.

Benefits of an Offset Mortgage

Reduced Interest Payments

One of the primary benefits of an offset mortgage is that it can help reduce the interest payments on your mortgage.

By using your savings to offset your mortgage debt, you’ll pay less interest on your mortgage balance, which can result in significant savings over the life of your mortgage.

Flexibility

Offset mortgages offer a high degree of flexibility compared to other types of mortgages. You can deposit or withdraw funds from your savings and current accounts without any penalties.

Most lenders allow their customers to make overpayments of up to 10% of the outstanding balance in each calendar year without incurring an Early Repayment Charge and an Early Repayment Charge will be payable on the amount repaid that is in excess of their 10% allowance.

Tax-Efficiency

Offset mortgages are tax-efficient because you don’t earn interest on your savings or current accounts. Instead, the interest you would have earned is used to offset the interest charged on your mortgage. This means you don’t have to pay tax on the interest earned on your savings, which can result in significant tax savings.

Access to Funds

With an offset mortgage, you can access your savings and current accounts whenever you need them.

This can be especially beneficial if you have unexpected expenses or need to make a large purchase.

You can withdraw funds from your savings and current accounts without any penalties, which can be more cost-effective than taking out a loan or using a credit card.

Conclusion

An offset mortgage can be an excellent option for residential homeowners who want to reduce their mortgage interest payments and have more flexibility with their finances.

With an offset mortgage, you can use your savings to offset your mortgage debt, which can result in significant savings over the life of your mortgage.

Additionally, you have the flexibility to access your funds whenever you need them, and most lenders allow overpayments of up to 10% without any early repayment charge.

If you’re considering an offset mortgage, it’s essential to speak to a mortgage advisor to ensure it’s the right option for you. You can contact our team online or call us on 01322 553282 and we’ll be more than happy to help!