Offset Mortgages

What are offset mortgages?

The principal behind offset mortgages is that they make it easier to pay off your mortgage earlier and in doing so potentially save you thousands of pounds in interest payments. Basically you do this by setting your savings and current account against your mortgage. By forgoing any interest you might earn on them you reduce your mortgage interest payments so that your monthly payment to your lender is paying off a bit more of your outstanding capital than it otherwise would. So if, for example, you have £10,000 in savings you wouldn’t earn any interest on it but at the same time you would reduce the amount of mortgage debt you are paying interest on by £10,000.

Put simply, each £1 you have saved is £1 of mortgage debt you don’t pay interest on. Even your monthly salary being paid into an offset current account helps because, as interest is calculated on a daily month, will be able to offset your salary while it is still sitting in the account before you have spent it.

What are the pros and cons of offset mortgages?

Pros of offset mortgages:

Offsetting your current account against your mortgage account is extremely beneficial particularly to high earners who often have a large amount of income in their current accounts at various times which is earning little or no interest anyway. It always makes sense to get your money working for you as best you can and in these days of historically low interest rates you will be saving a lot more in mortgage interest payments than you will be losing in forgoing interest on savings or income.

Some lenders will also allow you to lump personal loans or even credit card debt in with your mortgage so that you are paying the same rate on them as you are on your mortgage. This obviously makes sense because a mortgage is usually the cheapest way to borrow money.

Intelligent Finance once estimated that a borrower with a £175,000 mortgage, an Individual Savings Account (ISA) and A current account with the same lender and who was overpaying £50 per month into a 25-year mortgage could save £80,000 in interest, and reduce their payment term by almost five years!

Offset mortgages are extremely flexible. You can make unlimited overpayments but you can borrow back money or take payment holidays if you have overpaid enough. Any overpayments you have made are always available in your account and easily accessible in case of an emergency. Some lenders will also allow you to make underpayments.

Cons of offset mortgages:

Initially they can be quite difficult to understand. If you are thinking off lumping credit card debt in with your mortgage you need to consider whether this is a good option. Yes the interest rate will probably be a lot lower but the you could have the debt for longer as the average mortgage term is 25 years, and the consolidated debt will also be secured on your home.