What Is An Offset Mortgage And Should I Have One?
Offset mortgages can save an individual a great deal of money. They can either shorten the term and enable you to be mortgage-free sooner or help you in reducing the monthly payments. But still many of us fail to understand this concept. In fact, some are not even aware of its existence. Those who are not availing this opportunity are missing out £10000 on savings.
How Do They Work?
An offset mortgage is a product that enables you to connect the mortgage to savings. The amount of interest charged on a mortgage is reduced by the savings balance. The savings will be offset against the value of mortgage and the interest will only be paid on the differences between savings balance and mortgage balance. The savings is not used as a repayment of the mortgage, they just are along with it and saves you interest. Here is an example how it works:
You have a mortgage of £50,000. An interest of 4% is to be paid on it. You also have £5,000 in your savings account. By offsetting these savings, you only need to pay interest on £45,000 of your mortgage. Over the course of the year, this can save you £200.
Lower Payments Or Shorter Terms?
Offset mortgages are versatile in nature. You can choose how you can make the most out of the interest that is saved.
With lower monthly payments, the mortgage term remains the same the amount that is paid back each month is less.
A shorter term keeps the payment same but the term of the mortgage is shortened.
Many people tend to put offset mortgages aside just because they have heard it is too restrictive or expensive but the truth is different.
- One can get their money very quickly.
- Even a small amount of savings can have a substantial difference.
- The interest rates are not much higher. Just like other financial products, there is a variety of rates available in the market.
- It is advisable not to have all the savings in one account. Having several saving accounts offset against the mortgage is more beneficial.
Save More By Overpaying
Even the savings are offset by the mortgage, you can still add to them. More the money is offset, more the interest is saved. The overpayment is allowed with some offset mortgages. It has the similar effect like one of saving interest but with a larger difference.
Physically repaying a portion of mortgage means overpaying. This means losing access to money if needed later. Whereas, offset savings remain with the mortgage. There is no repayment which means you still have access to money. However, You can read more about the best offset mortgages at Propillo.com.
Pros And Cons
Offset mortgages are ideal to save interest on mortgages. But just like other financial products, there are some disadvantages as well.
Nevertheless, here are some advantages:
- More interest can be saved than earned in a savings account.
- No tax is to be paid on the interest that is saved. On the other hand, the tax is to be paid on the interest earned in a savings account.
- Allows you to retain access to the savings.
- Enables you to finish the mortgage sooner or make lower monthly payments.
- It can allow parents to help their children get on the property ladder.
On the other hand, here are some disadvantages:
- The savings do not earn interest. Offsetting against mortgage is not a recommendable idea if you are relying on your savings for income.
- Since the savings do not grow, it loses all the spending power.
The Bottom Line
Here was a detailed description of what an offset mortgage is and why one should get it. Getting through the details enable you to put your hands on a good deal.