Offset Mortgage Explained

Offset Mortgage Explained

What is an offset mortgage?

Offset mortgage can be explained as a type of mortgage-linked to an offset saver bank account. The mortgage balance is offset with the savings account balance and interest is charged only on this subtracted amount. There are two main ways to utilize the offset option named as reducing the monthly payment and reducing the term of the mortgage. Let’s see which method suits you out of the two methods. Before that, let me give explain how offset mortgages work with a small example,

If your mortgage balance is 400,000 GBP and you have 20,000 GBP savings, you can open an offset saver account with your lender. So, interest will only be charged on 380,000 GBP which is the offset balance.

The differences between standard and offset mortgage

#01 A standard mortgage charges you interest on the outstanding loan amount. An offset mortgage charges you interest on the offset balance with the savings account. This can help you save reasonable amounts of interest monthly. This is the most important stand out point between standard mortgages and offset mortgages.

However, it is important to note that offset mortgages do not reduce the outstanding balance of the mortgage as a whole. Lots of people misread this concept as they think the mortgage balance can also be reduced by using the offset option. This opinion is wrong. The offset mortgage can only help you with saving interest or reducing the term of the mortgage

#02 Another significant difference between standard mortgages and offset mortgages is that offset mortgages interest rates are relatively higher compared with standard interest rates (Even higher than the Expat Mortgage rates). This can undo the benefits of offset savings up to some extent. Therefore, it is important to do a detailed comparison between your mortgage deals before deciding to proceed with an offset mortgage.

Can I take my money back from the offset saver account?

Absolutely Yes, you can take money out of the offset account at any time you wish. This is one of the biggest benefits of an offset mortgage. In a standard remortgage if you want to make an overpayment towards the mortgage or need to put more deposits as a first-time buyer with higher mortgage property valuation, you can not take money out of the mortgage. Instead, you can take your savings cash out at any time with this mortgage. Once you take your money out of the off-set saver account it will no longer reduce your monthly payments based on the interest component.

Which option is more beneficial? Large deposit or offset

As mentioned above, you can take money out of your offset saver account at any time. This is why offsetting is more beneficial than putting down a large deposit or overpayment. If you are planning to settle your current mortgage soon and buy a new property in the future, you might need cash as a deposit. So, it is decision-making time whether to put all your cash in the current mortgage is always best to get the insights of a fin-tech mortgage broker before you decide. It is very important to plan your monthly payments including the largest direct debit for many which is the mortgage payment. So, if you have savings and planning to settle your current mortgage soon and buy a new property in the future, the best way to benefit is offsetting!

Reducing the interest cost VS reducing the mortgage term

There are two main ways that you can benefit from an offset mortgage. First, reducing the interest cost. Second, reducing the term of the mortgage. If you look at the overall picture, you can benefit more by reducing the term of the mortgage including Buy to Let mortgages. For example, once you reduce the mortgage term by 2-3 years it makes a huge difference compared with reducing the monthly interest cost. You can use the Coventry Offset calculator to try this and it will prove the fact that reducing the term is overall beneficial.

However, there can be instances where reducing the interest is also be much important. Specifically, when you are struggling to manage your mortgage payments due to the pandemic, it will be important to reduce your mortgage payment. So, using the offset is one of the best options you have as a solution for the current uncertain situation in terms of salaries and wages.

Can I apply for offset mortgage while being inside the fixed deal period?

Well, it depends on the lender and the type of product you have agreed on. Lenders like Scottish Widows bank offer lots of offset products including all of their remortgage products have this offset option. Therefore, if you have a mortgage with Scottish Widows Bank, and planning to open an offset account for your mortgage, it is well and truly possible.

On the other hand, most lenders do not provide this facility along with their normal remortgage products. They have separate offset products for new customers which are slightly expensive than standard mortgage products. Therefore, if you are closer to the end of your current fixed deal period and planning to refinance, why not check your chances for an offset mortgage!

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