Whether you’re thinking about buying your first home or looking into your different options when remortgaging, it’s important to understand what’s out there. We recognise that the world of mortgages can seem complex, and when a large sum is at stake, you want to ensure you make the best decision possible.
At Key Mortgage Advice, we aim to provide you with all the knowledge you need to feel confident about your choices. That’s why we’ve put together a guide to one of the mortgage types that can often be overlooked: offset mortgages.
We’ll walk you through how an offset mortgage works so you can see if it might be a good option for you. Don’t forget, you can always speak with an experienced mortgage broker in Preston for tailored advice.
How Does An Offset Mortgage Work?
An offset mortgage differs from a standard mortgage in that it takes your savings into account. When you arrange an offset mortgage, you’ll still need to pay back the borrowed amount along with interest, but you can “offset” some of the repayment total with your savings.
The money from your savings doesn’t pay towards the borrowed amount as such. Instead, it reduces your interest total.
Let’s take a look at how this might work in practice…
If you borrow £250,000 but you have £20,000 in savings, you can use those savings to reduce your interest. In this case, you would only pay interest on £230,000. This is known as ‘partial offsetting’.
Another option is to fully offset your mortgage interest – this is possible when you have enough in your savings to cover the full mortgage amount, meaning you don’t pay any interest.
What Is A Fixed Rate Offset Mortgage?
A fixed-rate mortgage ensures you pay the same amount of interest every month for a fixed term (usually three or five years). This is in contrast to variable mortgages, where the interest rate can fluctuate.
A fixed-rate offset mortgage lets you use your savings to lower your overall interest, while having the peace of mind that your interest rates are fixed for the agreed length of time.
What Are The Benefits Of An Offset Mortgage?
Because offset mortgages lower your overall interest, they can be a wise investment choice, saving you money in the long run.
However, cost savings aren’t the only advantage. With offset mortgage deals, you can also:
- Gain flexibility – you can still add to your savings account and withdraw as you wish.
- Pay back your mortgage more quickly.
- Pay less tax on your savings.
Will An Offset Mortgage Always Save You Money?
For many, an offset mortgage can be a great investment choice, but it’s always worth acquiring all the facts before jumping in and applying.
Every financial situation is different, and you may find that an offset mortgage doesn’t actually save you much in the long run. For example, you might find that using your savings to pay a larger deposit unlocks lower interest rates. Or, if your savings account has a good interest rate, it may be more financially savvy to keep the lump sum there, where it can accrue more than you would save with an offset mortgage.
Other potential drawbacks of an offset mortgage include:
- You’ll generally need a higher deposit for an offset mortgage (usually a minimum of 15%).
- If you take money out of your savings account, your mortgage repayments may increase.
- Fewer lenders offer this type of mortgage, so you may be more limited in your choices.
- Offset mortgages tend to have higher interest rates than standard mortgages.
If you’re still unsure whether this is a suitable option for you, feel free to get in touch to speak with a knowledgeable mortgage broker in Garstang who can help you weigh your choices.
You can also use our handy mortgage calculator to get an idea of your affordability and likely repayments.
Can You Offset Mortgage Interest Against Rental Income?
If you’re a landlord with a buy to let mortgage, you may be wondering if you can offset your mortgage interest with income from your tenants. In the past, this was a possibility. However, the rules changed in 2020, meaning that you can’t offset your mortgage interest with rental income. You can find more information about this on the gov website.
However, landlords are eligible for a tax credit, which is worth 20% of their mortgage interest. If you need a hand with understanding how this might affect your buy-to-let mortgage payments, we’re just a phone call away, so feel free to contact us for support.
Which Banks Offer Offset Mortgages In The UK?
Offset mortgages aren’t as common as standard mortgages in the UK. However, there you can still find great deals with trusted lenders, including NatWest, Barclays, and Coventry Building Society.
As experienced mortgage brokers in Southport, we can help match you up with the ideal lender and mortgage deal for your unique circumstances.
Knowing the pros and cons of different mortgage options can bring you one step closer to securing your dream home. We recognise that it can be a lot of information to take in, which is why our supportive mortgage brokers are here to help make the process as smooth and stress-free as possible.
Whether you’re a first time buyer or you’re looking to remortgage and have a sum of money in your savings, don’t hesitate to get in touch to see if an offset mortgage could work for you.
Our team of mortgage brokers is here to provide expert advice that puts your best interests at the forefront. Email enquiries@keymortgageadvice.co.uk or fill out our enquiry form to book a free consultation.
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