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What is an offset mortgage?

An offset mortgage is a type of mortgage which allows you to save money by reducing your monthly payments, potentially allowing you to pay off your mortgage more quickly by shortening its term.

By linking a mortgage with your savings, the offset mortgage product works by reducing the total amount of interest that is charged as the savings are 'offset' against the value of the mortgage. In most cases interest is then paid on a balance which is worked out by subtracting the savings balance from your mortgage balance, saving you money.

Can you give me an example?

Take a mortgage of £200,000 paying an interest rate of 5%. And let's say you have £15,000 in a savings account too. With an offset mortgage, you would only pay interest on £185,000 of your mortgage, due to the reduction that your savings can give you. So over the year, this could save you £750.

Save as you go

Offset mortgages offer you a choice - either save on your monthly repayments thanks to the savings you have offset against the mortgage, or reduce the time frame that you will be paying the mortgage off for, reducing the length of the plan.

There is nothing to stop you improving the terms of your offset mortgage as you go. As you add to the total of your savings account, you will enhance your offset mortgage by reducing the interest.

Another option is overpaying. Some, but not all offset mortgages also allow you to overpay, thus paying off your mortgage quicker in the long run.

What are the advantages?

Offset mortgages allow you to save a higher amount of interest than you would be able to earn from your savings account, meaning they can make financial sense. There is also no tax paid on the interest you save, as opposed to standard savings accounts with the exception of ISAs.

You can also have access to savings at any time - but note that your interest will go up if your savings diminish.

What are the disadvantages?

You should remember that your savings won't earn interest if they’re held in an offset account. This means that they will not grow if you take out an offset mortgage, but as highlighted above, in the long run you could still be saving money thanks to your lower mortgage interest.

The choice to get an offset mortgage should always be made based on your individual circumstances, and you should always seek professional financial advice before taking such a step.

Please note:

  • Your home may be repossessed if you do not keep up repayments on your mortgage.
  • Tax treatment varies according to individual circumstances and is subject to change.

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