Offset mortgages have only been available in the U.K. for a few years, but they are already becoming quite popular.
Offset mortgages are not for everyone. However, for some borrowers, particularly higher-rate taxpayers with substantial savings, they are an excellent choice.
They offer borrowers the opportunity to pay less interest and to pay off their mortgages early.
A borrower’s savings account and/or current account are linked with the mortgage. The borrower has to give up receiving interest payments on the savings accounts. Instead, the borrower gets to pay less interest on the mortgage. The amount in the asset accounts is subtracted from the amount of the mortgage, and the borrower only has to pay interest on the difference.
Because borrowers stop receiving taxable interest on their savings, they pay less in taxes. Another advantage is flexibility. Borrowers can overpay and in some circumstances underpay or take payment holidays on their mortgages. This flexibility may be especially useful for self-employed people whose income fluctuates.
A disadvantage is that the mortgage rate for offset mortgages is usually higher than available discount rates. There may be an initial rate which is low, but borrowers should consider what the long-term rate will be.
As a general rule of thumb, offset mortgages are most beneficial for borrowers who are higher-rate taxpayers and who have substantial savings. Some experts recommend offset mortgages only for borrowers who have savings equal to at least 15% of the amount of their mortgages. Other experts recommend an even higher percentage.
Borrowers who wish to obtain offset mortgages will find they have many choices in the U.K. A growing number of financial institutions now offer the mortgage.
Many online banks offer free offset mortgage calculators on their websites. Anyone considering an offset mortgage should use one of these calculators to see if this mortgage is right for their individual circumstances.