offset mortgage and the benefits these can offer

You live and you learn… and this is exactly what happened to me recently. I have learned about a new type of mortgage just recently. It is called offset mortgage. So I decided to share this with you as well.

I want to share the concept of the offset mortgage first. I will cover the key pros and cons I can see with these.

At the end of the day, you will be the one to decide what is right for you. There is a large number of different products available on the market. So the offset mortgage might not be right for everyone. This could be just the right thing for some though.

what is an offset mortgage

An offset mortgage is a product that allows you to use some of your savings to reduce the interest that you otherwise would accumulate with your standard mortgage.

After reading the above you will likely ask – do I need to simply reduce my outstanding balance with the savings I have? The answer to this is NO.

The way this product works is by combining multiple accounts into one mortgage. By taking out an offset mortgage you simply move your standard mortgage into a mortgage with a different name.

On top of the above – you use a separate offset savings account to move your savings into. What the bank does for you – they only charge you interest on the value of your mortgage less the savings you hold.

how you benefit from the offset mortgage

The obvious benefit with the offset mortgage – you pay interest on a smaller amount than you have actually borrowed. This opens up 2 options for you to explore and pick from.

Firstly, you can keep paying the smaller mortgage payments. This way you get to benefit from reduced monthly commitments and use money for other needs. 

I would personally encourage you to consider investing the difference – although these savings will likely be fairly small. Small investments can really change your life in the long run. You invest little and the compounding does the rest for you.

Secondly, the option you also have is to increase your monthly payments to what they alternatively would have been. This way you won’t feel a cash benefit by using the offset mortgage however you will significantly reduce the time it will take to clear your mortgage.

what happens to your savings

This is another point to be aware of – you are still in full control of your savings. You are able to access these savings at any point and use them for any emergency you might have.

You should know that the moment you take some of the savings out – the interest you are paying will go up. The bank regularly recalculates these payments for you based on the value of both accounts.

The way you can actually further benefit from the above – add more cash into your savings. As you do that, the bank will be further reducing the interest that you will be charged on monthly basis.

Before you sign up to an offset mortgage – read the small print to make sure the terms and conditions allow you to access your money at any point or there is an option to add further cash to the savings.

other benefits of offset mortgage

There are a couple of other benefits you could get with the offset mortgage that people don’t always see straight away.

If you make interest on your savings – you have to pay tax. The only way to avoid the need to get in touch with the taxman is by using ISA for your savings. By using your savings to offset the mortgage – there is no need to pay tax on this!

On top of the above, there is a further benefit you are very likely to pocket yourself. In most instances that I have observed – the interest on savings accounts is way below the mortgage interest you have to pay.

This makes sense as banks borrow your money to lend to other people. The difference between the 2 is their profit margin.

By offsetting your mortgage with your savings you can actually benefit the difference between the 2 interest rates. Let’s say your mortgage is 5%. While your savings pay you 2%. You would be paying 3% extra on your mortgage compared to savings.

The above difference is exactly what you can make yourself by using the offset mortgage.

parents can help their kids

There is one other way these types of mortgages can be used to benefit from. Parents can use these mortgages to help their kids get on the property ladder.

While giving your kids money is not always an affordable options, offsetting some of their mortgage with your savings could be a whole different conversation to be had.

By offsetting the mortgage with savings – kids get to pay less money in interest while parents still get to access their savings in case they need them.

The issue here might be – not all banks will allow for a mortgage to be held in one name while the offset account in a different persons name. There are ways to go around this issue. One example could be by gifting the money to your kids with a promise to get it back when needed.

This is something you will have to decide for yourself as no one knows the relationships you have within your family.

what are the negatives of offset mortgages to be aware of

There are few things that can be seen as negatives for these types of mortgages. 

Firstly, you don’t earn any interest on your offset account. As mentioned above, this might not be the biggest issue as savings interest are often way smaller compared to mortgage interest you have to pay. On top of the above, interest you make on savings is taxable.

Secondly, offset mortgages can have a higher interest rate attached to them to start with. This is something that is hard to put a value on as every person will be getting different interest rates.

My recommendations here would be following. Sit down and do your maths on options you have. The numbers will speak for themselves in terms of which options ends up being cheaper after you account for higher interest charged while offsetting some of the mortgage value.

You can use an offset mortgage calculator to understand which option makes more sense to you personally.

The alternative to the above – speak to your mortgage adviser and see their opinion on this.

summary

As mentioned at the start – offset mortgages is a new product I have learned about recently myself. And I can already see a lot of positives to these.

The way I see myself potentially using these – storing my emergency fund in the offset mortgage. The benefit of doing the above – I have the best of both world. I have an emergency fund in case things go south but also make sure this money is working for me.

The key with the above in my view – do your homework in terms of numbers. You want to make sure you get the best deal and pay the least possible over the life of your mortgage.