Homebuyers with savings they want to hang onto rather than put towards their property purchase may want to consider using an offset mortgage to reduce the overall amount of interest they pay.
An offset mortgage enables homeowners to link any savings they have to their mortgage. They can still access their savings whenever they want, but as this money is offset against their mortgage, they’ll only pay interest on the amount that’s left once the savings balance has been deducted. The savings and mortgage must be held with the same provider.
So, for example, a homebuyer taking out a £200,000 mortgage who has £60,000 in savings would only have to pay interest on £140,000, which is the difference between the amount of savings they have and the amount they’re borrowing.
Cutting the cost of borrowing
Given that interest rates are currently so low, and returns from savings accounts are often negligible, an offset mortgage can often make sound financial sense for homebuyers.
Although they won’t earn any interest on their savings, they won’t have to pay any tax on the interest they save on their mortgage.
Like standard mortgages, there are various different types of offset mortgage available, so homebuyers can choose from fixed, variable and tracker rate deals.
Those who want peace of mind that payments will remain the same each month may want a fixed rate offset mortgage, whereas those who believe that interest rates are likely to remain low for a while yet may prefer a variable rate offset mortgage.
Standard versus offset rates compared
Offset mortgage rates do tend to be slightly higher than standard mortgage rates, and it’s not always easy for homebuyers to work out which is the most cost-effective option for them.
Finding the best deal will depend on various different factors, such as the amount of savings they have and how much interest they’re earning, as well as the interest rate of the offset mortgage.
It’s therefore a good idea for homebuyers to seek professional advice from a mortgage broker who can crunch the numbers on their behalf and calculate the best deal based on their individual circumstances.
As a general rule, however, the more homebuyers have in savings, the more likely it is that an offset mortgage may be a good option for them.
Family offset mortgages
Offset mortgages are also accessible to first-time buyers with family who are keen to provide financial support to help them onto the property ladder.
Several lenders provide family offset mortgages which enable parents, grandparents or other family members to offset some of their savings against the amount borrowed. This can be particularly useful for buyers on limited incomes, as it means they’ll have less interest to pay each month.
Taking out this type of mortgage also means parents don’t have to hand their savings over permanently.
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