By way of example, if your mortgage balance is £160,000 and you have £30,000 in savings, you will only be charged interest on £130,000. This allows you to repay your loan sooner and potentially make significant savings in interest fees.
A main advantage of this is flexibility. You can continue to pay in or withdraw money from the savings account, but if you do choose to take any money out, you will begin paying more interest on the mortgage. However, on the flip side, the more you pay in, the less interest you will pay. Many lenders allow mortgage over-payments too, which is another way of reducing the amount of interest you are charged also, but this may well mean you are no longer able to access that money. By paying the money into the linked savings account instead of an offset mortgage, you would reduce the interest payable, but still be able to withdraw the money later if required.
It is worth considering though, that by using your savings to offset your mortgage, you won’t earn any interest on your money. That said, rates are pretty low at the moment, so it’s worth keeping an eye on interest rates before making an informed decision.
When taking out an offset mortgage, there are usually a couple of benefit options – lower monthly repayments (saving you money in the short-term), a shorter term but with the same repayment amount (which pays your mortgage off sooner, which also means you pay less interest) or the option of repayments that reduce every year, assuming the interest rate stays the same.
Alternative options include current account mortgages and family offset mortgages. With the current account option, you combine your current account with your mortgage as opposed to your savings and the family offset allows you to link family or friends savings accounts as well, meaning they can help make your mortgage cheaper without having to give you any money, albeit they won’t earn any interest on their savings.
As whole of market advisers, we compare all the options available to you and to make sure that you get the best possible rate, but rates can sometimes be higher than with standard mortgage, so we will also check to see if you could save more by getting a cheaper normal mortgage and savings account.