Offset Mortgages: Link your savings account to your mortgage to save.

Our blog is for your general interest. Whether or not it applies to your current financial position, please feel free to share it with friends, family, or colleagues who may be interested.

To make sure you never miss our latest blog, sign up .

June 17, 2021 - Kevin Dunn

Offset Mortgages: Link your savings account to your mortgage to save.

A year of Covid restrictions and lockdowns have meant financial change for many people. Some people have benefitted by being able to save more, but others have faced hardship. Many have revisited their attitudes towards money and financial security.

One of the surprises has been the return in demand for offset mortgages. This type of mortgage links together your mortgage and savings account, so any money you hold in your accessible savings account is used to reduce the size of your mortgage loan. Whilst you don’t get paid interest on your savings, instead you benefit by paying pay less in mortgage interest every month.

With interest rates so low, the renewed interest in this type of mortgage has been a surprise. But for high rate tax payers, the self-employed and those looking for the flexibility of holding larger sums in cash savings, the benefits of an offset mortgage can be great.

How does an Offset Mortgage work?

A straightforward repayment mortgage is taken out to cover a re-mortgage or purchase of a home, for example for £500,000. A savings account is simultaneously taken out with the same provider.

The borrower deposits their savings into this account which is “linked” to the mortgage account. Every month the lender calculates the interest which has to be paid based on the total amount borrowed on the mortgage, less the amount held in the savings account.

In other words, if the borrower has a £500,000 loan, but also has £50,000 in the savings account, the interest is only calculated on the difference between the two, in this case £450,000. This means that less mortgage interest is being paid and therefore either the monthly payments are reduced, or the capital balance is paid off quicker.

How are offset mortgages tax-efficient?

An offset mortgage can be tax efficient if you are a higher-rate or an additional-rate taxpayer. This is because you are not paid any taxable interest on the cash you hold, and you are not using up your Personal Savings Allowance. Your savings do provide a return, but they do this by bringing down your mortgage interest payments – which means you don’t face a tax bill.

Are my savings accessible with an offset mortgage?

One of the biggest reasons people choose an offset mortgage, rather than using the money to pay off a lump sum on a mortgage, is that you can access the cash when you need it (although some lenders may require you to keep a minimum balance).

This can be quicker and easier than remortgaging to release cash from a standard repayment mortgage, and for some people, they might be building and holding long terms savings for a specific reason, such as future university fees for children.

Self-employed people often choose to hold larger sums in accessible savings, as they are more vulnerable to the peaks and troughs of freelance work. If you make a withdrawal from your savings account, that money will no longer offset your mortgage, and consequently your repayments will go up. Owners of Limited companies also have the opportunity to use offset mortgages as a tool to managing more complex finances. In some cases, you can borrow funds from a Limited company to offset against a mortgage, and repay the loan back to the business once the mortgage loan has been repaid.

When is an offset mortgage not suitable?

It may be worth considering switching to a different type of mortgage if you don’t have substantial savings of around £10,000 or more. Likewise, if you have an offset mortgage and then spend your savings, leaving little in your linked savings accounts for a long period of time, then it may be worth switching to another mortgage product.

If you would like to find out more about offset mortgages and if they are suitable for your circumstances, then our financial advisers are Furnley House would be happy to help. Call 0116 269 6311 to get a no-obligation quote, or email info@furnleyhouse.co.uk.

Your home may be repossessed if you do not keep up repayments on your mortgage.