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Home > Mortgages > Offset
Many of you will have noticed that interest rates on mortgages and other kinds of loans are much higher than the amount of interest you can earn by putting your money in a savings account in the bank.
For those with a bit of money saved up the way to save the most money in the long run would be to use those savings to pay a lump sum off your mortgage and save on interest payments. However, most people are sensible enough to know that having some money saved in the bank for a rainy day is almost never a bad thing. This is where offset mortgages can come in.
In practice, this means that you have both a mortgage and a savings account with the bank you borrow from. When you have money in the savings account, rather than earning interest on that money, it counts against what you owe on your mortgage, thereby saving you interest.
For example, say you borrow £100,000, at an interest rate of 6% and have £10,000 in your savings account which has an interest rate of 4%. Instead of getting the 4% interest on the £10,000 of savings, it is offset against your mortgage so you are only actually paying the 6% interest on £90,000. This has the potential to save you quite a bit of money in the long run.
You could also be saving even more money than you think. For those of us that pay tax, don't forget that you also pay tax on any interest you receive on your bank accounts. This means that you aren't actually getting the gross interest rate on your savings account as you will be paid net, or after tax, interest.
When you want to use some of your savings, you can just take it out of your savings account like normal. You will then have slightly less of a balance offsetting your mortgage and you will start paying more on your mortgage again.
Some banks will also allow you to offset against your current account as well as your savings account which can save you even more in interest.
Offset Mortgages
Offset mortgages are another newer kind of mortgage that has been introduced in the last few years.Many of you will have noticed that interest rates on mortgages and other kinds of loans are much higher than the amount of interest you can earn by putting your money in a savings account in the bank.
For those with a bit of money saved up the way to save the most money in the long run would be to use those savings to pay a lump sum off your mortgage and save on interest payments. However, most people are sensible enough to know that having some money saved in the bank for a rainy day is almost never a bad thing. This is where offset mortgages can come in.
How do Offset Mortgages Work?
The basic premise of offset mortgages is that they count your savings against your mortgage whilst leaving the money available for you to use when you need it.In practice, this means that you have both a mortgage and a savings account with the bank you borrow from. When you have money in the savings account, rather than earning interest on that money, it counts against what you owe on your mortgage, thereby saving you interest.
For example, say you borrow £100,000, at an interest rate of 6% and have £10,000 in your savings account which has an interest rate of 4%. Instead of getting the 4% interest on the £10,000 of savings, it is offset against your mortgage so you are only actually paying the 6% interest on £90,000. This has the potential to save you quite a bit of money in the long run.
You could also be saving even more money than you think. For those of us that pay tax, don't forget that you also pay tax on any interest you receive on your bank accounts. This means that you aren't actually getting the gross interest rate on your savings account as you will be paid net, or after tax, interest.
When you want to use some of your savings, you can just take it out of your savings account like normal. You will then have slightly less of a balance offsetting your mortgage and you will start paying more on your mortgage again.
What can you offset?
The amount you can offset will vary by lender. Some have no limit on the amount of money you can offset so in the extreme case you could be paying no interest on your mortgage at all.Some banks will also allow you to offset against your current account as well as your savings account which can save you even more in interest.
Combining Offset Mortgages
Some lenders allow you to combine offsetting with other kinds of mortgage. For example, you can combine the advantages of offsetting with the benefits of a fixed rate mortgage or a tracker mortgage.About Us | Privacy | Sitemap | Directory