Offset mortgages explained
An offset mortgage links your mortgage to your savings account. It lets the interest you could’ve earned on the savings contribute towards paying off your mortgage repayments instead.
If you’ve got a standard mortgage, the amount of interest you’ll have to pay is based on the total loan. If you’ve got an offset mortgage, the interest is paid on the total mortgage minus whatever is in the savings account or accounts linked to the loan.
For example, if you have a mortgage of £200,000 plus £10,000 in a linked savings account, you’ll have to pay interest charges on the difference – that is, on £190,000 of your mortgage. This means that, depending on the deal that you have with your lender, an offset mortgage could let you:
- overpay your monthly repayments (therefore paying it off sooner),
- have smaller repayments, or
- pay now based on the full mortgage calculations now but reduce your future payments.
You also won’t be charged tax payments on the money that you’ve saved by offsetting your mortgage with interest from your savings account.
However, having an offset mortgage means that you’ll forgo any interest that you could’ve otherwise earned from any linked account or accounts. As offset mortgages are not a popular offering, your choices could be limited. You may also find that you’ll typically face higher interest rates on offset mortgages than on standard ones.
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