What is an Offset Mortgage?

Offset mortgages can be a great way to save money, particularly in times of increasing base rates and are one way to help reduce your mortgage costs. They can either help you to reduce your monthly payments or shorten the term and help you get mortgage-free sooner.

How offset mortgages work

Offset mortgages are a type of product that let you link your mortgage to your savings.

The savings balance is used to reduce the amount of interest charged on the mortgage. Your savings will be 'offset' against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest. It works something like this:

An example:

You have a mortgage of £100,000. You're paying an interest rate of 3.00%.

You also have £10,000 in a savings account. By offsetting your £10,000 savings you only pay interest on £90,000 of your mortgage.

Over the course of the year this can save you up to £300.

If you'd have left these savings in a savings account paying 2.00% (which is a very good rate at the moment), you would have earned £200 in interest. If you have to pay tax on your interest, it would be even less.

Plus you'd still have to pay that £300 you didn't save on the mortgage.

Choose between lower payments or a shorter term

With your offset mortgage, you can choose how to benefit from the interest you save:

• Lower monthly payments. Your mortgage term remains the same, but you pay back less each month.

or

• A shorter term. Keep your payments the same and you will actually shorten the term of your mortgage!

Make bigger savings by overpaying or saving more

Once your savings are offset against your mortgage, you can still add to them – more money offset means more interest saved.

Some offset mortgages also allow you to overpay. This will have the same effect of saving you interest, but with one big difference.

Overpaying means you physically repay part of your mortgage – you may lose access to this money if you need it later. Offset savings, on the other hand, remain alongside the mortgage. They don't repay it, so you still have access to your money.

Offset mortgages can be great for parents helping children get on the property ladder. As opposed to becoming a guarantor, or physically giving your child money towards buying a new home, offset mortgages offer a great alternative.

Some offset mortgages allow family to offset their savings against a relative's mortgage. The benefits are that:

• The mortgage holder saves interest while the savings are offset – they can either benefit from lower payments or from a shorter term.
• The parent retains control and ownership of their money, while helping their child through the expensive early years of home-ownership.
• Offset mortgages offer a great way for parents to help their child, without physically giving the money to them if they can't afford to.

The parent can then transfer their money into a normal savings account - once the child is ready to take the reins of the mortgage fully.

The pros and cons of offset mortgages

Offset mortgages are a great way to save interest on your mortgage, but there are disadvantages as well:

Pros:

• Save more interest than you can earn in a savings account
• Put money aside for tax bills and save on interest on your mortgage until you need to pay your tax bill
• You can get at your money quickly – it's not locked away
• A small amount of savings can make a big difference – a modest pot of £2,500 could shorten a £100,000 mortgage by seven months over a 25-year term!
• You don't have to have all of your savings in one account. You can have several savings accounts offset against your mortgage – even family members can offset their savings against your mortgage!
• Pay no tax on the interest you save – you may have to pay tax on interest earned on a normal savings account (apart from cash ISAs)
• Keep easy access to your savings (remember the mortgage payment may go up if you make a withdrawal from your savings)
• Finish your mortgage sooner, or make lower monthly payments
• Help a child or relative to get on the property ladder

Cons:

• Your savings don't earn interest. So, if you rely on your savings for income, offsetting against someone else's mortgage is not a good idea
• Your savings will lose their spending power, as they won't grow

Joint-borrower-sole-proprietor Mortgage

In some ways, a joint-borrower-sole-proprietor mortgage is similar to a standard mortgage.

All borrowers are scrutinised by the lenders, with expenses and income taken into account to measure affordability.

Borrowers must meet the lender’s criteria, including age limits, income and creditworthiness. Some mortgage providers have a joint-borrower-sole-proprietor mortgage age limit whereby applicants must be no older than 70 at the end of term. Other lenders may set the age limit at 80 years of age.

Because all the mortgage holders are liable for repayments, missing payments could affect all of their credit profiles.

The crucial difference with a JBSP mortgage is that only one of the borrowers – the proprietor – is named on the property’s ownership deeds. Lenders often insist that this person lives at the property.

This type of mortgage means that parents or other loved ones who don’t want a long-term interest in the property can easily exit the arrangement when the proprietor can afford a mortgage on their own.

The mortgage can also have benefits for Stamp Duty. Ordinarily, if you were buying a property with someone who has a home already, the purchase would attract second home Stamp Duty at a rate of 3%. However, with a JBSP mortgage, the other parties avoid triggering this liability.

For more information on the Offset Mortgage, joint borrower sole proprietor mortgage or for a free mortgage health check please contact Danire Services Ltd on 01763299461 or email Danny Antoniou at danny@danirefinance.co.uk