Offset Mortgage

Introduction

Buying a home is a significant investment that requires considerable money. Most people usually apply for a mortgage to finance their home purchases.

However, traditional mortgages can be expensive and take a long time. An offset mortgage is an alternative option to help you reduce your mortgage interest and pay it off faster.

Define Offset Mortgage

An offset mortgage is a home loan that enables borrowers to link their savings and current accounts to their mortgage. The interest payable on the mortgage is calculated based on the outstanding balance minus the savings in the linked accounts. The borrower does not earn interest on his funds but utilizes them to lower his mortgage interest.

How Does Offset Mortgage Work?

Offset mortgage works by offsetting the savings in the linked accounts against the mortgage's outstanding balance. In this case, say a borrower has a $300,000 mortgage and $100,000 in savings in a linked account. In that situation, the mortgage interest is calculated on the remaining balance of $200,000 rather than the whole sum of $300,000. This indicates that the borrower's mortgage interest will be lower.

Characteristics of Offset Mortgage

Here are some detailed characteristics of the offset mortgage −

• Linked Accounts − Offset mortgages require borrowers to link their savings and current accounts to their mortgage accounts.

• Interest Reduction − The linked savings and current accounts help reduce the interest paid on the mortgage.

• Offset Arrangement − The offset arrangement allows the borrower to reduce the interest paid on the mortgage while maintaining easy access to their savings.

• Higher Deposit − Offset mortgages often require a larger down payment than standard mortgages since the lender wants to ensure that the borrower has enough resources to cover the mortgage interest.

• Flexibility − Offset mortgages provide more flexibility than traditional mortgages, as borrowers can access their savings whenever needed without penalties or fees.

• Tax Efficiency − In some countries like the UK, borrowers do not have to pay tax on the savings they use to offset their mortgage interest.

• Interest Calculation − Interest on the mortgage is calculated daily based on the outstanding balance.

• Overpayments − Borrowers can make overpayments on their mortgage, which will help reduce the overall interest paid and the mortgage term.

• Interest Rates − Offset mortgages typically have higher interest rates than traditional mortgages due to their added flexibility.

• Mortgage Term − The mortgage term for an offset mortgage is usually the same as a traditional mortgage, ranging from 15 to 30 years.

• Borrowing Limits − Offset mortgages typically have a borrowing limit based on a percentage of the property value.

• Early Repayment Charges − Some offset mortgages may have early repayment charges if the borrower decides to repay the mortgage early.

• Monthly Payments − The monthly payments for an offset mortgage are typically higher than traditional mortgages due to the higher interest rates.

• Mortgage Fees − Offset mortgages have higher fees unlike traditional mortgages.

Benefits of Offset Mortgage

Some of the benefits of offset mortgage include −

• Interest savings − Offset mortgage enables borrowers to save on mortgage interest and pay off their mortgages faster.

• Flexible access to savings − Offset mortgage allows borrowers to access their savings whenever they need them without penalty.

• Tax efficiency − Borrowers do not pay tax on the savings to offset the mortgage interest.

• Easy to manage − Offset mortgage is easy to manage as borrowers can link their savings and current accounts to their mortgage.

Pros of Offset Mortgages

A list of the pros and cons are mentioned regarding Offset Mortgages −

Interest Savings	By linking savings to the mortgage, borrowers can reduce the amount of interest paid.
Tax Efficiency	You don’t have to break your reserves to pay taxes on the savings interest as you are using the same funds for offsetting the mortgage.
Flexibility	Borrowers have access to their savings without facing penalties or fees.

Cons of Offset Mortgages

Higher Deposits	Offset mortgages have higher deposits as compared to the basic deposits.
Higher Interest Rates	Offset mortgages have a high rate of interest as compared to conventional or traditional deposits.
Mortgage Fees	The mortgage fees are comparatively high with respect to the traditional deposits

Tax Aspects of Offset Mortgage

The tax implications of offset mortgage depend on the country where the borrower resides. In the United Kingdom, borrowers do not pay taxes on their savings to offset the mortgage interest. Some of the countries that are actively participating in offset mortgage includes Australia, United States, United Kingdom, and others.

If you are one of those fat check tax payers, then, offset mortgage is something you might consider adding to your existing portfolio.

Examples of Offset Mortgages

Here are several offset mortgage examples.

• Standard Offset Mortgage − This is the most common type of offset mortgage. The borrower links their savings and current accounts to their mortgage account.

• Flexible Offset Mortgage − This offset mortgage allows borrowers to overpay their mortgage without penalty and withdraw overpaid funds when needed.

• Current Account Offset Mortgage − In this type of mortgage, the borrower links their current account to their mortgage account rather than a savings account.

• Fixed-Rate Offset Mortgage − This type of mortgage offers borrowers a fixed interest rate for a set period while allowing them to link their savings to their mortgage.

• Offset Buy-to-Let Mortgage − This type of offset mortgage is designed for landlords who want to offset rental income against the mortgage interest.

• Offset Tracker Mortgage − This mortgage has an interest rate that tracks the Bank of England base rate while allowing borrowers to link their savings to their mortgage. So, your monthly payment value relies on economic movements in the market.

Conclusion

Offset mortgages can be a beneficial option for borrowers with savings who want to reduce the interest paid. By linking savings to the mortgage account, borrowers can save on interest payments while maintaining access to their savings.

However, offset mortgages may come with higher deposit requirements, interest rates, and fees, and savings linked to the mortgage do not earn interest. Borrowers should carefully consider their financial situation and goals before deciding whether an offset mortgage is a right option.

FAQs

Q1. Can I access my savings if I have an offset mortgage?

Ans. Yes, you can access your savings linked to an offset mortgage account without facing penalties or fees.

Q2. Can I make overpayments on an offset mortgage?

Ans. Yes, many offset mortgages allow borrowers to make overpayments without penalty, which can help reduce the overall interest paid and the mortgage term.

Q3. Can I switch to an offset mortgage from my current mortgage?

Ans. Yes, switching to an offset mortgage from a traditional one is possible, but it's important to carefully check the terms and conditions of both options.