With savings rates still in the doldrums, many people are looking at other ways to make their money work harder.
One option for those not wanting to leave cash in an instant-access account is an offset mortgage.
But what exactly is this type of mortgage – and how does it work?
Are you sitting on a mortgage time bomb?
What is an offset mortgage?
An offset mortgage is a way of linking your savings account to your mortgage to help save money on mortgage interest.
This may be particularly appealing when the very best instant-access account is struggling to break 1.3% (and that’s with a bonus).
For many people, offsetting your mortgage balance is an attractive option.
Reduce the interest you pay
With an offset mortgage, instead of earning interest on savings, the money is set against the outstanding home loan, with interest only accruing on the remaining balance.
This allows you to make lower monthly repayments on your mortgage – or make overpayments against your mortgage – cutting years off your mortgage term, and reducing the amount of interest you pay overall.
Put another way, by combining your nest-eggs and mortgage balances, you may be able to save thousands of pounds in mortgage interest costs while at the same time reducing the term of your home loan.
Our guide to the things that could affect your ability to get a mortgage.
How it works in practice
For example, a borrower with a £150,000 mortgage and £30,000 savings would only be charged mortgage interest on £120,000.
That said, in many cases, the mortgage payments would actually be based on the full £150,000 loan, meaning the borrower overpays each month.
Offset mortgages may suit higher-rate taxpayers
Offset mortgages are a smart and tax-efficient way to cut mortgage costs.
They are particularly beneficial to higher-rate taxpayers, as there’s no tax to pay on your savings interest, and the equivalent return is the same as your mortgage.
This mean you can save 40% in tax on your savings if you use it to “save” with an offset mortgage.
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Offsets offer flexibility
Another of the upsides of offsetting is the fact this provides flexibility, as you can retain access to your entire savings balance in case you need to dip into it at any time.
By contrast, if you make an overpayment with a standard mortgage, there is no way of getting the money back once you’ve committed to the overpayment.
While an offset may sound appealing, this type of deal is not hugely popular with borrowers.
Part of the reason is low awareness, with some people wrongly thinking an offset mortgage is too complex, and others wrongly assuming it only makes sense for those with a large sum in savings.
The fact is, you don’t need a huge lump sum to benefit from offsetting; regular savings will work too.
For more tips and useful information, browse our money articles.