An Offset mortgage is a product that allows a borrower to ‘link’ their savings to their mortgage account. Clients only pay interest on the difference between the offset savings balance and the mortgage amount, so their savings reduce the mortgage interest they pay.
At its last review, the Bank of England voted to keep the Bank Base Rate at 5.25% which is the first non-increase since December 2021! Lenders have since reduced mortgage rates and we are once again seeing the cheapest products now below 5%.
Whilst this is a welcome relief from the constant upward movements, the cost-of-living crisis is still with us.
We are seeing many borrowers faced with large hikes on their mortgage payments as their low fixed rate deals come to an end and they are looking at how they can manage or even reduce this increase. One way if you have savings would be to repay a chunk of your mortgage and reduce the amount you owe but this can leave you with little or no savings and all your money tied up in your property, but there could be another option……
Offset Mortgages
In the realm of mortgage options, interest in offset mortgages has been gathering pace, however, they are often overlooked! Whilst not suitable for everyone, they can be very efficient for both savers, the self-employed and small business owners.
For example, somebody who has an outstanding mortgage amount of £200,000 and has £50,000 in an ‘offset’ account would only pay interest on the £150,000!
The benefit to savers
The money put into an ‘offset’ account won’t earn interest as such, it saves the interest on the mortgage instead. So, if you have a mortgage rate of 5.25% this is the equivalent rate you are receiving on your offset savings. The money held in the offset account can be added to or withdrawn at any time, so you have complete flexibility and access which may be preferable to making a lump sum repayment. The monthly mortgage costs are usually adjusted by your lender and will be lower if you have funds offsetting the mortgage.
Interest saved through funds stored in offset savings doesn’t count towards the personal savings allowance, so is tax efficient too.
The self-employed often put money aside for future bills such as tax, so are essentially a saver. The offset mortgage allows access to the money in the savings account when required, such as when the tax bill is due. So, using these savings to reduce the mortgage balance throughout the year is very powerful.
What to do if you are in financial difficulty
Do not do nothing. This can have the worst impact on you now and in the future. If you are struggling to pay your mortgage, speak to your lender. For other debts, it is worth speaking to the Citizens Advice Bureau or the Money Advice Service or National Debtline.
Blake and Day, is registered for all types of mortgages, later life lending and additional borrowing.
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