If you usually have a reasonable amount of cash sitting in a savings account earning a low interest rate but have an outstanding mortgage balance, then an Offset Mortgage could be right for you.
An Offset Mortgage links your mortgage account to a savings account and offsets the balance of one against the other. For example, if you have a £300,000 mortgage and generally keep around £70,000 in savings, you would only pay mortgage interest on the net debt of £230,000.
What are the benefits of an Offset Mortgage?
So why would you do this? Some people would argue that you should simply make a lump sum repayment towards your mortgage, and that is certainly an option. The problem is that you would lose access to those savings, which you may need for future plans or simply to provide financial security.
An Offset Mortgage allows you to retain access to your savings while still making effective use of them.
Flexibility is one of the key benefits of an Offset Mortgage. As well as being able to withdraw and deposit funds whenever required, it gives you peace of mind that, should you need emergency funds at short notice, you have full access to your savings without penalty.
Offset Mortgages can also be an efficient way of making tax savings. Even with the introduction of the Personal Savings Allowance, interest earned on larger savings balances may still be taxable. By offsetting your savings against your mortgage, you effectively remove these tax implications.
In most cases, the interest charged on your mortgage will be higher than the interest earned in a standard savings account. Therefore, you are often better off making a tax-free saving at the higher mortgage interest rate rather than earning taxable interest on your savings.
For higher-rate taxpayers, this can be particularly beneficial, as the savings made through offsetting are not subject to tax.
So why doesn’t everyone choose an Offset Mortgage?
One potential drawback is that the mortgage interest rate can sometimes be slightly higher than some mainstream mortgage products. Therefore, if you do not have a significant amount of savings to offset, it may not be the most cost-effective option.
However, for those with a healthy level of savings who still want immediate access to their money, an Offset Mortgage can be an excellent solution. As a general guide, it is often worth considering if you have savings equivalent to around 20% or more of your outstanding mortgage balance.
If you think an Offset Mortgage could be right for you, it is important to speak to a mortgage broker who can explain all of your options and help you find the most suitable deal.
Give us a call on 01494 778899, or email info@pffinancial.co.uk.
Learn more about our Mortgage Services.