With this mortgage, your savings are offset against your mortgage loan, which means that instead of earning savings interest, you are charged less interest on your mortgage. Your monthly mortgage payments are calculated on the full balance of the mortgage loan regardless of the amount of your offset savings. This results in overpayments being made each month equivalent to the amount of the offset interest.
The length of time it takes to repay the mortgage is not reduced as a result of this overpayment. Instead, when a mortgage payment recalculation event* takes place, the new payment is calculated on the reduced mortgage balance and the remaining term. The effect of offsetting therefore is to reduce future payments after recalculation events from where they would have otherwise been.
*Recalculation events include interest rate changes, a mortgage capital repayment, product switches, change of repayment method and change of mortgage term.
Who is an offset mortgage particularly useful for?
An offset mortgage may be suitable if you:
- Have excess funds allowing you to save regularly
- Already have savings
- Would like to reduce your mortgage but the need for access to your savings prevents you doing so
- Have unpredictable cash flow – if you are self employed, receive occasional large bonuses or commission or work on highly-paid short–term contracts
- Save regularly towards your annual tax bill
How does an offset mortgage work?
Let’s say you had a mortgage of £200,000 and a total balance of £50,000 in an offset savings account linked to your mortgage. We’ll calculate your mortgage interest on the remaining balance of £150,000 only – potentially saving you thousands of pounds in interest payments over the term of your mortgage.
YOU SHOULD NOTE THAT OFFSETTING DOES NOT REDUCE THE MORTGAGE TERM AND DOES NOT REDUCE MONTHLY PAYMENTS UNTIL A RECALCULATION EVENT TAKES PLACE (see below).
Effect on monthly payments
Having money in your offset savings account does not initially affect the payments you make. Instead, because the interest charged is lower due to the offset savings, your monthly payments are reducing the outstanding mortgage balance at a faster rate. This means that when you reach a mortgage recalculation event such as an interest rate change, the monthly payment required to repay the mortgage by the end of the term will be lower than it otherwise would have been.
Operating your savings account
You will be provided with a passbook for your Offset savings account. You can add or withdraw your savings whenever you want without penalty, either by cheque, Faster Payment or cash (within operating limits).
You can open your account with a nominal balance, but the more you pay in, the less interest you will be charged on your offset mortgage.
Click here to view our current offset mortgage products.