We’ve written a lot about fixed-rate and variable mortgages and how they are affected by interest rates.
But have you ever heard of an offset mortgage?
Introduced in the late 1990s, they were initially popular but fell out of fashion after the global financial crash and years of low interest rates.
Brokers say many people are unaware that this “underused” mortgage type exists – despite it offering a chance for some to lower monthly repayments and reduce the term of their mortgage.
How do they work?
Offset mortgages require you to have your mortgage and savings account with the same bank or building society, keeping both under one roof.
The amount you have in savings is subtracted from your outstanding mortgage before monthly interest is calculated.
For example, if you have £250,000 left on your mortgage and £30,000 in savings, you’ll only pay interest on £220,000 instead of the full amount, reducing your payments.
For someone on a standard repayment mortgage with a 5% interest rate and 25 years left on their term, this would take the monthly payments down from £1,462 to £1,287.
What happens to my savings?
You don’t lose your savings, but they act as a financial shield against your debt. You won’t earn interest on them, however.
The savings will remain accessible while offsetting the mortgage amount – though the benefit will obviously be lower the less you have saved.
Who benefits the most?
Though the thought of paying less mortgage interest is attractive, offset mortgages are largely beneficial for high earners and those with a large amount of cash in savings, says Philly Ponniah, chartered wealth manager and financial coach at Philly Financial.
“The downside is that they can carry higher interest rates than standard deals, so the benefits depend on how much cash you consistently hold,” she told Newspage.
Ponniah said they worked “especially well” for barristers who needed “significant sums set aside for their January and July tax payments”.
What do other brokers say?
Hannah Vandervennin, director and mortgage adviser at The Mortgage Consultancy, said offset mortgages were not “underloved by borrowers” but “abandoned by lenders”.
“We’re being nudged into longer and longer mortgage terms, paying interest for decades more than our parents did, while one of the few tools that actually cuts the interest you pay is quietly disappearing,” she said.
“Only two mainstream lenders still offer it to new borrowers now; it largely survives in private banking.”
Offset mortgages should “make a comeback”, added Nouran Moustafa, practice principal and IFA at Roxton Wealth.
“Most people are trained to ask ‘what is the cheapest rate?’ rather than ‘how can my mortgage and savings work together?'”
The mortgages required “discipline”, however, she said, adding that “easy access to savings is useful, but only if the money actually stays there”.
