Is Now the Right Time to Save and Offset?
An offset mortgage would help you pay off your mortgage quickly by reducing the levels of interest you pay on your loan. An offset mortgage has the same features as a traditional mortgage, including fixed, variable, and tracker rate options. On the other hand, an offset mortgage has one major advantage: linked savings or current account.
Before calculating the amount of interest you pay, your offset lender considers the credit balances in your linked savings or current account and effectively decreases them from your mortgage balance.
For Example, if you have a £200,000 mortgage and £50,000 in your linked current or savings account, the lender can only charge you interest just on the difference between the two – £150,000. However, you’ll save a huge amount of money on interest.
What Effect Will This Have on Your Monthly Payments?
Payment reduction and term reduction are the two main types of offset mortgages. Your overall monthly payments with a payment reduction offset mortgage will change depending on what interest you’re charged that month.
It means when you have savings in your linked savings account, your interest payments and your overall monthly payments would be lower than if you have a regular mortgage with no linked account, whether you’re on a repayment or interest-only mortgage. The term of your mortgage would not change.
According to the mortgage advisor, your overall monthly payments remain the same in a term reduction offset mortgage and you can reduce your term by overpaying, depending on how much money you have in your savings account and how much interest you’re charged each month.
Term reduction offsets are only available on a capital interest repayment basis, which means that when you make a monthly payment – that includes both capital and interest – you are overpaying your mortgage.
Advantages of Offset Mortgage:
A term reduction offset mortgage can allow you to pay off your mortgage faster instead of having money sitting in a savings account with falling returns from saving rates.
Some offset mortgage brokers in London may also provide the option of reducing your monthly payments, which means that the value of your current mortgage defines the amount you pay each month on your mortgage, less the amount saved.
Another advantage of offset mortgages is that they give you fast access to your savings while decreasing the cost of interest you pay on your loan. Finally, an offset mortgage account helps you to be more flexible.
Disadvantages of Offset Mortgage:
It could have a lower LTV, which is a major disadvantage. Therefore, you may have to make a bigger cash deposit. Although offset mortgages are more difficult for lenders to manage than standard mortgages, rates may be slightly higher.
Furthermore, as not all lenders offer offset mortgages, your options may be limited, and you’d be provided rates that are less competitive. Finally, offset mortgages aren’t just the most cost-effective option for every situation. That’s why you should speak with an Independent mortgage broker to ensure a great mortgage is possible.
For Whom Offset Mortgage is Beneficial?
An offset mortgage could benefit anyone with considerable savings with at least 10% of their mortgage loan. However, offsetting can be especially beneficial in various cases:
#1 – Taxpayers Who Pay Higher Tax:
If you want to avoid paying taxes on your savings, you might like to consider an offset mortgage because the lender isn’t “paying” your interest on your savings. Rather, they’re lowering the level of interest you pay them.
#2 – Self-employed:
An offset savings account is a good place to begin if you’re saving the money to pay a tax payment. You could also withdraw your cash reserves and connect them to your mortgage rather than keeping them in a business account that you pay for. If you’re thinking about doing this, it’s a good time to discuss it with your accountant beforehand.
#3 – Those making home renovations:
You may have to borrow a big sum of money and afterwards pay the contractors in installments. In this case, using an offset helps you lower your mortgage payment while you wait for your money to arrive, decreasing your overall cost.
Before making any final decisions, it’s important to talk to an expert mortgage broker like Mountview Financial Services. And you can tell them about any potential benefits and drawbacks of an offset mortgage account. For example, if you don’t have much in your savings account, the money in the offset account will not save you any money on your mortgage interest. In this case, it may be better to choose a different loan with a lower interest rate.