Offset Mortgages

Buying a home is generally one of life’s most significant events, even for those who have been through the process before.  This being so, getting the right mortgage can have a major impact on the family finance.

What Kinds of Mortgage Are Available?

With a repayment mortgage, the monthly payment covers both the capital sum borrowed and the interest due on it.  At the end of the term, the mortgage is guaranteed to be paid off in full, providing all the payments have been made on time.

With an interest-only mortgage, the monthly payment is simply to cover the interest owed.  At the end of the term the borrower needs to pay off the capital sum borrowed in full.

With an offset mortgage, the borrower essentially has access to a giant overdraft, which is available for a fixed term.  The balance must be paid off by the end of the agreed term..

What Are the Main Benefits of an Offset Mortgage?

The benefit of offset mortgages is that the savings made by reducing the interest due on the capital sum borrowed will be greater than the interest earned on money held in a standard current account or instant-access savings account.

Interest income is liable to tax, and the amount of tax due (if any) will, of course, depend on an individual’s circumstances.   For working-age adults however, there could be significant savings to be made by foregoing taxable interest income in favour of reduced interest charges.

Offset mortgages offer a higher degree of flexibility than either repayment or interest-only mortgages.  Borrowers on regular incomes can calculate how much they need to set aside each month to have their mortgage paid off by the end of the agreed term and stick to that.  Borrowers with more variable incomes can increase and decrease their payments in line with their earnings.  Likewise borrowers can dip into their savings, if they find they need or want to.  Hence overpayments can be made with confidence, since the money can be withdrawn if necessary rather than being locked away.

How Is Interest Calculated with Offset Mortgages?

In terms of interest, offset mortgages typically work in the same way as repayment and interest-only mortgages.  They may be fixed-rate, which means that the interest rate is set for a specified period.  They may also be tracker mortgages, in which the rate charged to borrowers goes up and down in tandem with changes in the interest rates set by the Bank of England.

Are There Any Disadvantages to Offset Mortgages?

Not so much a disadvantage, more as an observation, is that offset mortgages can be harder to find than either repayment or interest-only mortgages.  Borrowers may therefore have to look a bit longer before finding one.  Borrowers may also find it more challenging to move from one provider to the other in search of better deals (e.g. new fixed-rate deals).  While it is quite possible that the availability of offset mortgages will increase as people become more aware of them, this cannot be guaranteed.

Likewise, some people may prefer the security and imposed discipline of repayment mortgages, even if they may not be the best deal from a strictly financial perspective.  The flexibility of offset mortgages may lead to temptation or alternatively to individuals being overly worried about spending money which has been put into their mortgage fund.  Getting some advice from a financial adviser can help to resolve these issues and give you the best chance of finding the right mortgage for you.