An offset mortgage works by balancing your savings and, in some cases, the cash normally kept in your current account against the amount you owe on your mortgage, to reduce the monthly interest bill.
While you don’t earn any interest on the cash you offset, you aren’t charged any on the equivalent amount of debt.
If you have a reasonable amount to offset this can lead to substantial savings.
(For a full explanation, read The offset mortgage.)
The Downside of Offsetting
Of course, there would have to be a downside although it isn’t a particularly major one if offsetting seems to be right for you.
mortgage lenders generally set the interest rate on offset loans slightly higher than on ordinary fixed and discounted loans.
(It’s understandable they stand to earn less interest on this type of loan, and raise the rate to compensate.)
So, at a time when it might be possible to get a discounted variable rate mortgage at 5 per cent, or a fixed rate at 5.5 per cent, the vast majority of offsets will charge around 6 per cent or more.
A few might give an initial discount taking them below this, but it will be for only a year or two.
The Upside of Offsetting
Apart from saving you interest, the benefits of offsetting can include:
• No need to keep switching
In most cases, offsets are marketed as being loans for life.
In other words, the benefits are such that, if you find a good one, you’ll stick with it long-term, saving you the money and hassle of remortgaging every few years.
• No early Redemption Penalties
Many offset loans don’t carry early redemption penalties, so if you do decide to move on, you won’t have to pay a fee to leave.
(For more on this subject, see Early redemption penalties explained.)
• Payment Flexibility
Many offsets allow you to make under and overpayments or to take payment holidays.
Some will also let you drawdown (in other words, increase your loan) if you need extra cash, say, to renovate or extend your home. They can also be portable, which means you can move house drawing down more cash if necessary to cover the extra cost without needing a new mortgage.
To help you decide if an offset is for you, read Who should have an offset mortgage?