Offset mortgages: term and payment reduction options

An Offset mortgage links your easily accessible Offset savings account to your mortgage.

Your savings offset the mortgage interest you pay meaning the mortgage interest rate you are charged is reduced.

You can either reduce your monthly payments or the mortgage term, whichever you prefer.

As an example, if you Offset a mortgage of £100,000 with savings of £25,000, interest will only be charged on the £75,000.

Who might they be suitable for?

They are worth considering if you can make regular monthly savings, however large or small the sum, and if you like the notion of either paying off your mortgage early or reducing your monthly payments.

What is the Offset benefit?

The Offset benefit refers to the mortgage interest you save on.

Using the Offset benefit to reduce the term of your mortgage

To reduce your mortgage term, keep making your monthly mortgage payments as agreed when you first took out your mortgage.

Whatever Offset benefit you have will decrease the remaining capital balance. And this lowers the overall mortgage interest you pay and subsequently reduces the time it takes to pay your mortgage off.  

Remember that the sum you save will be dependent on how you balance your mortgage and Offset savings account.

If you choose to reduce the term, your monthly payments will only be reassessed if there are any important changes.  

Using the Offset benefit to reduce your monthly payment

Again, keep making your monthly mortgage payments as initially agreed.

Each month, your payment would automatically be reduced by the amount of the previous Offset benefit.

Whilst your mortgage term will remain the same, your payments will reduce as you pay less mortgage interest every month. This again depends on how you are balancing your Offset savings and mortgage.

It’s important to note that if the interest rate goes up, your monthly payments are likely to, too.

And note too how your Offset savings won’t be earning interest as it’s offsetting the interest on your mortgage. That said, there’ll be no income tax liability on those savings, either.  

The fact that interest isn’t paid on your Offset savings means that it won’t count towards your Personal Savings Allowance.

More money in your Offset savings account than your Offset mortgage?

In this instance, it’s probably worth moving some of your savings into a different account which will pay interest as you’ll receive no Offset benefit on the additional sum.

If your Offset savings account holds the same sum you owe on your mortgage, you’ll still need to keep up the capital repayments monthly.

If your Offset savings account holds no money, you’ll receive no Offset benefit and you might want to think about whether an Offset mortgage is still the best option for you.

What if you move?

You should be able to move and transfer your Offset mortgage if you want to.  

Overpayments

You can make small, impromptu overpayments, larger lump sum overpayments or regular overpayments. Charges may apply so you’d need to be aware of this.

It’s important to note that once the money has been transferred to your mortgage account, it can’t be transferred back and is subsequently inaccessible from then on. So, if it’s likely you’ll be needing that money any time soon, you’d be better to leave it in your Offset savings account.     

Here at Euxton Mortgage Market, we are always happy to help advise on the options that are available to you and the deals that will be most suitable for you. Call us today for more information.

September 2019