There are many different types of mortgages including variable, tracker, fixed, buy to let and offset. Offset mortgages are becoming more common in the UK with several major providers offering this type of mortgage to homebuyers. If you are planning on buying a new home and have been looking at mortgages you may want offset mortgages explained.
What is an offset mortgage?
Offset mortgages allow you to reduce the amount of interest you pay on your mortgage by taking into account the money you have in your savings account. If you have a mortgage of £150 000 and have £30 000 in your savings account, you will only be charged interest on £120 000 of your mortgage and in return you will earn no interest on the £30 000 held in your savings account. This represents the most common type of offset mortgage.
Another type of offset mortgage exists, whereby you actually pay the full mortgage payment each month and not a reduced payment. However as you are actually paying less mortgage interest you are paying more money off your principal and therefore will have your mortgage paid off quicker.
Benefits of an offset mortgage
Offset mortgages offer tax benefits to all tax payers as there is no tax deducted from their savings. The 20% and 40% tax rates for regular and high tax payers respectively will not come into play as no interest is earned on savings deposit accounts linked to an offset mortgage. The interest that would be earned is forfeited in order to reduce interest charges on mortgage payments. The benefits are much greater for high tax payers who would normally lose 40% of their annual interest on a savings account. Commonly mortgage rates are much higher than that offered by standard savings accounts so everyone wins.
Offset mortgages are beneficial to those that like to save regularly and maintain a large amount of money in their savings, while still being able to receive the benefits of a reduced mortgage payment. Normally in order to receive a reduced mortgage payment you would be required to pay a lump sum of money off your mortgage. This lump sum is therefore still available for unexpected emergencies rather than being tied into your mortgage. However if you do choose you spend the lump sum on anything but your mortgage you will not benefit from the reduced mortgage interest charges.
Offset mortgages provide an additional way for home owners to pay off their properties. There are many benefits of offset mortgages such as being able to save money on tax and being able to keep large sums of money in case the unexpected happens.