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 firstname.lastname@example.org.
Your home may be repossessed if you do not keep up repayments on your mortgage.