- Offset mortgages link your savings account to your mortgage loan account. With an offset mortgage, you stop earning interest on your savings account. Instead, your lender uses your savings account balance to reduce the calculation of your mortgage interest. For example, if you have a £100,000 mortgage and £10,000 in your savings account, you only pay interest on £90,000. As such, the more money you have in your savings account, the less mortgage interest you pay.
- Offset mortgages have the obvious advantage of reducing your interest expense. They also have a tax advantage. If you earn interest on your savings account, you would normally have to pay income tax on it. Because you don't actually receive any interest on your savings account with an offset mortgage, you don't have to pay the income tax. This makes offset mortgages more beneficial if you have a high income tax rate.
- If you don't have much cash saved, you may not benefit from offset mortgages. Offset mortgages often have high interest rates that can eliminate any savings you get from the offsetting arrangement. If you don't watch your savings balance, you may lose unearned interest with offset mortgages. If you have more in your offset savings account than you owe on your mortgage, the extra balance doesn't reduce your interest payment and you don't earn any interest on it.
- According to the "Financial Times," you should consider offset mortgages if you have at least 5 percent of your mortgage balance in savings. If you are self-employed, you can use the money you set aside for income tax in the offset savings account to reduce your mortgage interest payment. If you receive big bonuses from work, you can also save a lot with offset mortgages by putting them in your offset savings account.
Features
Benefits
Drawbacks
Suitability
SHARE
