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What is an offset mortgage?
An offset mortgage is a type of mortgage that is linked to one of your savings accounts.
How does an offset mortgage work?
Offset mortgages work by ‘offsetting’ the amount of money you need to repay on your mortgage against what you have in a savings account.
The money in your savings isn’t used to pay off your mortgage. It’s used to lower the total interest you’ll be charged on your repayments each month.
Lenders ‘take away’ the amount in your savings account from how much you owe on your mortgage. You’ll only pay interest on what’s left. So, you pay less interest than if you had a repayment mortgage.
Things to think about with an offset mortgage
If you’re a diligent saver, you may be thinking about an offset mortgage, but they might not always work out cheaper overall. This will depend on your situation and how you’d like to pay off your mortgage.
- You could save more on your mortgage interest than you would have earned in a savings account.
- You’ll pay zero tax on the interest you save.
- You can still make deposits and withdrawals from your savings account.
- Your savings won’t earn any interest if used for an offset mortgage.
- You may want to use your savings to pay for a bigger deposit.
- Interest rates can be higher with offset mortgages. If you have a bigger deposit, you might be able to pay less each month.
Handy to know
Even though it could make your mortgage repayments cheaper, you won’t earn any interest on those savings your mortgage is ‘offset’ against.
Let’s take a closer look
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With an offset mortgage you could make lower monthly repayments because you’ll pay less interest on what you borrow.
If you want to pay off your mortgage quicker, paying over a shorter term will mean bigger repayments. You would have lower monthly repayments on a longer mortgage term.
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You can still pay in and withdraw from your savings account with an offset mortgage. But the more money you take out, the less you’ll save on your mortgage interest. Alternatively, if you keep topping up your savings, you’ll reduce the amount of mortgage interest you would pay.
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Most lenders will let you overpay a certain amount each year on your offset mortgage – usually up to 10% a year. Make sure you check any limits on overpayments. Paying more than you are allowed could mean you have to pay an early repayment charge.
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