The Bank of England’s battle against inflation is starting to leave casualties. As mortgage repayments shoot up to follow the Bank of England (BOE) base rate rise many people are becoming anxious about how they will afford their home.
At Continuum we are always keen to find ways to help people who have run into mortgage problems – and one solution might be an offset mortgage.
Using your savings, without spending them
An offset mortgage is a special type of mortgage that allows you to offset your mortgage balance against the balance held in any linked accounts with the same lender.
What this means is that you don’t receive the interest your savings should earn – instead it goes towards the interest on your mortgage loan. So, the amount of interest you pay on your mortgage will be reduced by the amount of money you have in your linked accounts.
For example, if you have a mortgage balance of £100,000 and £20,000 in linked accounts, you will only pay interest on £80,000. This can save you a significant amount of money, especially if interest rates are high – and the more savings you have, the less mortgage interest you pay.
The money in your savings account will not be at risk. You don’t eat into it to pay your mortgage, and you can still access it whenever you need to. But the more you put away, the less you pay.
If you have built up a reserve of cash that you want to preserve for the future – for your retirement perhaps – an offset mortgage could get it working for you now.
Is an offset mortgage right for you?
Offset mortgages can be particularly useful if you are self-employed and especially if you earn large bonuses or need to set money aside to pay tax bills, because it puts the money which would just be laying in the bank to work for you. They can also be ideal for wealthier borrowers. Any savings offset against your mortgage are not liable for savings tax because they are not earning any interest.
Rising interest rates mean you are likely to pay tax on savings, especially if you are a higher rate payer. You don’t pay tax on your savings with an offset mortgage, because you are not earning any interest on them
What are the disadvantages?
Keeping your savings but getting them to work for you – and cutting your tax bill at the same time – sounds like the impossible situation of having your cake and eating it. But there are some drawbacks to consider.
First, offset mortgages are not available from all lenders. Most do not like offsets because they do not make money on them when borrowers have large reserve of cash on deposit. So to bring the interest down, you will need to shop around to find one that offers them. You should also be aware that there may be some restrictions on the type of linked accounts you can use.
Interest rates can also be a little higher than comparable deals with standard accounts. There may also be an annual fee with some providers.
So is an offset mortgage right for you?
Offset mortgages look like a great way to save money on your mortgage payments if you have cash you want to both keep and use. There are also some attractive deals about – but you need to look carefully before you decide if one is suitable for you.
Here are some things to consider:
The interest rate: You can’t fix and offset. The interest rate on an offset mortgage will be linked to the base rate, so it is important to look carefully at the rates offered by different lenders.
Fees: Some lenders charge an annual fee for offset mortgages, so it is important to factor this into your decision.
The accounts you can link: You will need to check which types of linked accounts are accepted by the lender. Some lenders only accept current accounts, while others also accept savings accounts. What’s more, some lenders allow you to make unlimited payments into your linked accounts, while others restrict the number of payments you can make each month.
If you want to consider an offset mortgage, it is important to do your research and compare the different options. The mortgage market is changing fast at the moment. A call to us at Continuum could help you find the latest deal – and get an expert view on the solution for you.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate taxation advice.