The concept of an offset mortgage is essentially straightforward. It permits an individual’s savings to counterbalance their mortgage debt, only charging interest on the remaining difference. Interestingly, monthly mortgage payments are computed on the total debt prior to the offset application. This means every month, borrowers inadvertently pay more than required towards their debt, resulting in the mortgage being settled considerably quicker than a standard loan. Plus, borrowers don’t have to pay tax on the interest there would normally earn on their savings.
If we take a concrete example, a borrower with a £100,000 mortgage, utilizing Intelligent Finance’s offset tracker loan rate of 5.24%, could save over £39,000 in interest across the mortgage term by offsetting the loan with £20,000 of savings. Additionally, they could repay the loan five years early, compared to a classic 25-year mortgage.
Approximately 25% of mainstream mortgage providers offer offset deals. Some are current account mortgages, like the One Account deal endorsed by the Royal Bank of Scotland, which allows borrowers to offset savings as well as their current account balance against their mortgage. Combined, offset and current account mortgages represent roughly 10% of the home loans market.
Most offset mortgages have interest rates tied to the Bank of England base rate, but there are options available with a fixed or capped rate. They also offer flexibility for borrowers to pay off the principal without penalties, underpay, or even take a payment break, provided they have made enough additional payments throughout the year.
However, there’s a flip side. Offset mortgages typically have higher rates than traditional ones, meaning borrowers pay more for the flexible benefits. Thus, they may not be the perfect fit for everyone. Industry data suggests they’re not universally favored among consumers.
From the data by mortgage broker John Charcol, only 1% of borrowers selected an offset loan last month, in comparison to 20% who took base rate tracker deals, and 18% who opted for low two-year fixed deals.
Mortgage adviser James Cotton from London & Country, advises that for an offset deal to be more value-laden than a traditional mortgage, higher-rate taxpayers would require to offset at least £10,000 in savings against a £100,000 mortgage.
According to Ray Boulger from Charcol, offset mortgages may not suit every buyer, but some unique features can be found attractive. For instance, they can allow borrowers to offset multiple savings, and current accounts. Some mortgage providers even offer structures that enable parents to use their savings to offset their children’s mortgage, reducing monthly repayments while still retaining access to their funds if needed.
Mark Pittaccio, a business development manager from Hertfordshire, appreciates the flexibility of offset mortgages. Over the past six years, his offset mortgage has enabled him to revamp a property, purchase a car, establish a business, and effectively plan his taxes. Despite the rates being slightly elevated than some competitive two-year deals, Mark believes the additional benefits he receives make it worth the extra cost.
