What are Offset Mortgages and How Do They Work?
Offset mortgages link to your savings accounts and offset the amount you have outstanding on your mortgage borrowing against your savings with the same bank.
You pay interest on the net balance of debt, therefore reducing the interest you pay, but also sacrificing any interest you might have earned on the savings.
As an illustration:
- You owe £100,000 on your mortgage and have £10,000 in cash savings.
- If you use an offset mortgage, you pay interest on the £90,000 net balance.
- On a 3% interest rate, that means an annual saving of £300.
To calculate the actual cost of an offset mortgage, you also need to account for the 'lost' interest earnings on your savings account.
However, average interest earnings stand at around 1.5%. So in this example, you sacrifice the £150 interest income, and therefore make an overall saving of £150 on the cost of your mortgage per annum.
What Sort of Bank Accounts Can I Offset Against my Mortgage?
Savings accounts are the primary type of asset used as an offset, but some lenders will also allow you to offset multiple accounts, including your current account.
If you have savings and cash balances in several accounts, that means you can further reduce the interest cost of your home loan.
In some cases, you can also offset with a cash ISA - although this depends on the policies of the lender. Many mortgage providers with offset products will not permit fixed-term ISA offsets.
Remember that any account you offset will not earn any interest income.
Products such as stocks and shares cannot be used as a mortgage offset.
Can Family Members Use My Savings as an Offset?
They can - and this is ideal for first-time buyers, or lower-income family members, who have a close relative with substantial savings.
Lenders who offer a family offset mortgage will allow you to offset your mortgage borrowing against a savings account held by your family member.
What are the Advantages of Using an Offset Mortgage?
There are pros and cons to taking out an offset mortgage, and it is essential to understand these before you proceed with any applications:
- You can use an offset mortgage to 'earn' more against your savings than you would have on regular savings interest when inflation is rising, or the interest rates earned are low.
- Offset mortgages help to reduce the monthly interest charge on a mortgage and are popular with self-employed people looking to reduce their outgoings to provide for taxation liabilities.
- In most cases, you can opt to continue with a higher mortgage repayment, at the same level you were paying before the offset. This option means making overpayments that reduce your overall mortgage debt and mean you can pay it back faster.
- Some lenders will offer the option to withdraw overpayments if you need to - which can provide a fast cash boost when you need capital, or be retained in the mortgage to allow you to miss some repayments.
- Linking multiple accounts and current accounts can reduce your mortgage interest further.
- Family offset mortgages can assist first-time buyers with purchasing a property at an affordable interest rate.
- You still have access to your savings accounts - although the reduction in the balance will be reflected in your mortgage interest calculations. Some lenders stipulate that a minimum balance must be left in situ.
Are there Disadvantages to Offset Mortgages?
As well as several plus points, there are pitfalls to this type of borrowing product to be aware of:
- Interest rates are usually higher than on other mortgage products.
- Offset mortgages mean sacrificing the interest you would have earned on your savings (although mortgage interest charges are usually higher than the interest earned).
- If you have a low savings value, an offset mortgage may not be the most cost-effective option given the higher interest rates.
- Most lenders require a higher deposit, with lower Loan to Value ratio caps.
How Do my Savings Help Reduce my Mortgage Payments?
Offset mortgages are available from a variety of different lenders, from banks and building societies to specialist lenders.
Not all lenders have an offset mortgage product, so the first step is to identify a shortlist of potential lenders, and to establish whether you meet their eligibility criteria.
Another route is to remortgage from a standard product to a repayment product, with your existing bank or with a new lender.
Your savings and current accounts being used as the offset need to be with the same lender as your mortgage, so it may be necessary to switch these accounts over if you choose to move to a different provider.
What are the Typical Criteria for an Offset Mortgage?
Each lender will have different policies about whom they will lend to - the standard criteria, and the typical requirements are as below.
- Income - lenders need to know how stable your employment is, and what your work situation is. Most mortgages can be to a maximum value of 4.5 times your annual income. In some cases, this is increased to five or even six times.
- Property - if the property is non-standard, i.e. it is built from something other than bricks and mortar, or has a thatched roof; you usually need to apply to a specialist lender with experience in lending against non-standard homes.
- Credit rating - lenders will always need to run a credit report, and if you have adverse credit issues, it may be advisable to apply to a specialist bad credit lender.
- Age - some lenders set a maximum of 75 or 85 years old, whereas others have no maximum.
- Expenses - your affordability calculation will take into account other debts and outgoings, to ensure your net income can comfortably cover the mortgage repayments.
- Deposit - offset mortgages generally require a higher deposit. Lenders will review what value deposit you have available, and from where those funds are being sourced.
Also, your savings account(s) and current account(s) need to be with the same provider as the mortgage.
What Deposit is Required for a UK Offset Mortgage?
Typical residential mortgages are available with as little as a 5% deposit, depending on your circumstances and the lender.
For offset mortgages, the deposit is usually much higher with around 25% as the average, given that the LTV maximum is higher.
In some cases, you can take out an offset mortgage for 80% or even 90% of the property value, but that is unusual and is often only when you are an existing mortgage customer of the bank and are switching from one mortgage product to another.
Is it Possible to Get an Offset Mortgage at 100% LTV?
It is highly unusual to get an offset mortgage at 100% of the property value.
An alternative where you are keen on an offset mortgage and do not have the requisite deposit is to consider a guarantor mortgage. This product means having an immediate family member - or in some cases, a close friend - offer their savings assets as collateral, by placing them in an account with the mortgage lender.
Is There a Limit to How Many Accounts I Can Link to an Offset Mortgage?
It all depends on the lender. Some accept current accounts and joint accounts, as well as savings accounts held with them.
Is There a Minimum Term on an Offset Mortgage?
Most offset mortgages run on similar terms as any other residential mortgage, so usually around 25 years.
You can choose to make over-payments if permitted by your lender, which can reduce your debt balance, and shorten how long it will take to pay back the borrowing.
It is essential to check whether your lender will levy early repayment charges if you are considering doing this.
Are there Offset Mortgages for Business Professionals?
There are; offset mortgages are ideal for business people that have substantial savings. There are also specific offset mortgage products aimed at professionals, such as accountants, dentists, engineers, doctors, pharmacists, teachers and vets.
Are My Savings at Risk if Offset Against my Mortgage?
Under the FSCS (Financial Services Compensation Scheme), any savings are protected up to the value of £85,000, so even if your lender went into administration, your assets would be protected.
If you have over £85,000 in savings, give us a call for advice about protecting your savings.
Is There a Maximum I Can Borrow Through an Offset Mortgage?
There isn't a specific maximum, and you can get a large offset mortgage.
The deposit payable and LTV maximums will still apply, and you will need to comply with all the eligibility requirements to take out a higher value loan.
Expert Advice with UK Offset Mortgages
Revolution Brokers work with a vast number of offset mortgage lenders and provide independent advice to ensure you take out the most competitive borrowing on the market.
Give us a call on 0330 304 3040, or drop a message to [email protected] for more information about offset mortgages, and to find out which lenders are ideally suited to you.
