Offset mortgages - are they for you?

Caroline Cassidy

With interest rates at a low and the cost of living increasing all the time, an offset mortgage could help homeowners to either cut their monthly outgoings or pay their mortgage off ahead of time.

Offset mortgages
Offset mortgages

Pic: Getty

Yet a poll by uSwitch revealed that the equivalent of 1.6 million people in the UK don't know what an offset mortgage is. We check out the pros and cons of this type of home loan.

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What is an offset mortgage?
An offset mortgage takes into account any linked savings accounts (including current accounts) that you may hold and deducts the interest on the home loan accordingly. For instance, if you have a £130,000 mortgage and have £10,000 in a linked savings account, you will only pay interest on the difference, i.e. £120,000.

This can cut monthly outgoings considerably when times are tight. Alternatively, carry on paying the interest on the full mortgage and you could pay the loan off ahead of schedule, ultimately saving you money by knocking off years of interest.

What are the pros?
Many homeowners find the flexibility of an offset mortgage extremely helpful. In these times of financial and employment uncertainty, an offset mortgage allows you the chance to overpay when things are going well, and slash your monthly mortgage costs if something goes wrong. Even a small savings pot can make a big difference and you can have several savings accounts offset against your mortgage - even those of willing family members.

However, though your offset savings effectively count as an overpayment on your mortgage, they are still accessible should you need emergency money (though your mortgage payments will go up as a result), and better still, the interest you earn is tax free. If you continue to deposit money into your offset savings account, you can cut your monthly mortgage payments, or the term of the loan, even further. With savings interest rates so low at present, offsetting any nest eggs against your mortgage could prove a much better deal.

What are the cons?
Interest rates are typically higher on offset mortgages than on other options, but that said, there are increasingly competitive deals around so it pays to do your research.

Though your mortgage payments or term may come down significantly thanks to your offset savings account, your nest egg will not earn interest. Therefore they are perhaps not the best option for those relying on savings for income as that lump sum will not grow.

Are they right for you?
The principle of offset mortgages might seem tricky to begin with, but once you realise what it could mean for your monthly payments, they start to seem like a very good idea, particularly if you have a sizeable nest egg earning very little interest in the bank.

Not only do they offer the flexibility of either overpaying or cutting monthly costs - which might prove particularly beneficial to self-employed homeowners - but they are a great way for parents to help their kids onto the property ladder by offsetting their own savings against their child's mortgage.
Higher interest rates on this type of mortgage do mean that they're suitable for everyone though, and if you regularly tuck into your savings account the continually changing monthly mortgage payments could prove something of a headache.

If you think an offset mortgage could be for you though, do your research with the banks and building societies. Most offer this type of home loan, but not so many shout about them so visit comparison sites and look for the best deal - it could save you thousands in the long-term.

Have you taken the plunge with an offset mortgage, and would you recommend it to others? Leave your comments below...