With saving rates at an all time low and a shaky stock market a question often asked is ‘should I use my savings to pay down my mortgage?’ Seems sensible but it does then commit your cash and this may be unnecessary as there is a more flexible way to achieve the same aim. Welcome to the world of offset mortgages.
The most famous Offset bank accounts was founded back in 1997 when Virgin and the Royal Bank of Scotland launched the Virgin One offset mortgage account. It was simple – people who had both savings and a mortgage could offset their savings against their mortgage. What was more, they could save thousands of pounds in interest over the term of the loan if used correctly. The lastest research has revealed this market to be a real growth area with 1 in 10 mortgages that are currently being arranged falling into this category.
If you are considering an offset mortgage, the first rather obvious question to ask is whether you have any savings. An offset mortgage generally carries a small premium for all the benefits that we will run through later, so if you have no savings or even a relatively small amount then there is little point in switching. An example of how offset bank accounts work will show you why: let’s say you have £20,000 of savings stashed away, currently earning a tiny bit of interest. With an offset arrangement these savings can really work for you because if your mortgage is £100,000 then you only pay interest on £80,000 (the difference between the mortgage and the savings in your offset account). You are normally faced with two choices, to pay the cost of the mortgage on the £80,000, thereby having a cheaper monthly payment, or you can make the same payment, essentially overpaying your mortgage and therefore reducing the term and the interest that you pay in the long term.
With offset mortgages, you can have different accounts for mortgage, savings, tax bills etc. So if you wish to keep your funds saved in different pots this can still be achieved.
You may also have the chance to overpay, underpay (particularly good for the self employed), and even borrow back funds that have been overpaid. You can also take payment holidays if you have already overpaid and can repay lump sums each year without penalty.
Generally these types of mortgages are tracker rate deal linked to the Bank of England base rate, however there are some fixed rate deals on the market. All the interest saving benefits of paying down your mortgage but with your savings still in place in case of a rainy day.