Offset Mortgages explained - Apply for an Offset Mortgage

Offset Mortgages are designed for those who want to pay off their mortgage early. In this way, if you have the capital you can pay off your debts ahead of schedule and live without mortgage debt.

The concept behind Offset Mortgages began in Australia but it wasn’t until around 10 years ago that they became popular in the UK. This type of mortgage uses a borrower’s savings or income to help pay off a mortgage, reducing interest rates in a high interest savings account.

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How do Offset Mortgages work?

Mortgage debt is reduced by using the borrower’s savings. This means that the borrower can avoid paying excess tax on interest as the daily interest rate works towards canceling the debt. Offset Mortgages can be beneficial due to the higher interest rates which are attached to mortgage savings accounts. These accounts can provide more money towards paying off the mortgage than the interest in an ordinary savings account, and are ideal for those with a large amount of saved money.

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The interest rates associated with Offset Mortgages are normally less attractive than other types of traditional mortgage. You may find that if you shop around you can find a standard mortgage which has better rates of interest. In other words, unless you have large savings or a lot of capital in your current account Offset Mortgages are not the best choice for you.

What are the advantages of an offset mortgage?

Offset mortgages allow borrowers to use the interest from their savings to pay off their mortgage debt this is particularly suitable for homeowners in a higher tax bracket or with large amounts of savings (usually 20% of the value of the mortgage). Offset mortgages can be cheaper than traditional mortgages and it is a tax efficient way of paying using your savings to pay off your debt. The biggest advantage of an offset loan is that it is extremely flexible as it allows you to make overpayments or underpayments without incurring penalty fees.

What are the disadvantages of an offset mortgage?

In order to get an offset mortgage you will have to use a bank that is affiliated with your mortgage lender, this could disrupt your current banking habits. Offset mortgages can make your finances complex so you need to be organised in order to track your in-goings and out-goings. Because of the flexibility of offset mortgages and the benefits of using interest from your savings, offset mortgages can often charge higher interest rates than traditional mortgages, usually about 0.5-1% more. The biggest disadvantage though to an offset mortgage is that it is only suitable for prospective homeowners with large amount of savings.

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