At a time when borrowers are enjoying record low interest rates, but savers are struggling to make their money work for them, offset mortgages can really come into their own. This type of scheme allows homeowners to link their savings or current account balances to their mortgage and only pay interest on the difference between the two.
In simple terms, instead of earning interest on their savings, the borrower pays less interest on their mortgage. That means that the effective rate of return on the savings is at the mortgage rate but because no interest is earned, there is no tax to pay. As a result offset can be especially effective for higher rate tax payers.
Lenders may then offer 2 options – borrowers can either keep their mortgage payment the same in order to reduce the overall term of the mortgage, or reduce the monthly payments. Importantly, mortgage-holders retain access to their savings at all times, and can add to or withdraw from their accounts as needed. The interest charge will simply be adjusted accordingly.
After deciding to capital raise on their residential mortgage in order to fund a Buy-to-Let purchase, our clients approached the mortgage service for the Guild of Professional Estate Agents looking for advice.
With a significant level of savings, representing around 20% of their new mortgage, they were keen to secure an offset product. Their adviser carried out calculations and found that by offsetting their savings and current account balances, the clients should be able to pay off their mortgage almost 2 years earlier, saving thousands in interest.
Their adviser was able to secure them a 5 year fixed rate deal at less than 3%, and using their savings alongside the mortgage would mean paying less interest over the 5 years than if they had chosen a traditional scheme with a lower rate.