The Offset Mortgage Why Is It Growing In Popularity
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The Offset Mortgage: Why Is It Gaining Popularity?
Offset mortgages have emerged as a major innovation in the mortgage market, rapidly capturing a notable share. Just six years after their introduction, these mortgages, combined with current account mortgages, represent 10% of all borrowed mortgage capital. According to a leading UK mortgage lender, around 25% of current mortgage holders could potentially save money by choosing an offset mortgage. Here’s why you should consider it.
What Is an Offset Mortgage?
An offset mortgage links your savings with your mortgage. Instead of paying interest on your entire loan amount and earning interest on your savings separately, you pay interest only on the difference between the two. For example, if you have £25,000 in savings and a mortgage of £110,000, you would only pay interest on £85,000. Your savings don’t earn separate interest but reduce the mortgage interest.
Key Benefits
Tax Efficiency
Offset mortgages are particularly beneficial for higher taxpayers. Normally, interest earned on savings is taxed, but with an offset mortgage, you pay less interest on your mortgage without earning separate interest on your savings. This makes it ideal for those paying over 40% tax.
Interest Savings Illustration
Consider a £100,000 mortgage over 25 years at a 4.69% interest rate:
- Traditional Mortgage Interest Payments: £85,351
- Offset Mortgage Interest Payments: £41,998
- Savings: £43,353
With an offset mortgage, you could pay it off in just 19 years and 4 months due to overpayments.
Flexible Payment Options
Offset mortgages offer flexibility, allowing you to overpay, underpay, and take payment holidays without penalties.
Why Isn’t Everyone Using Them?
Offset mortgages have historically had higher interest rates, deterring some borrowers. However, as they gain popularity, more competitive rates are becoming available. Still, the interest rate is often higher than fixed-rate mortgages, so it’s important to ensure that tax savings offset the higher interest charge, typically with the help of a mortgage adviser.
To make an offset mortgage worthwhile:
- Standard taxpayers should have at least £20,000 against a £100,000 mortgage.
- Higher rate taxpayers may need only £10,000.
Variations in Offset Mortgages
Lenders offer varied incentives, such as free property valuations or legal work. Banks may include your current account in the offset calculation, while others might offer multiple savings accounts, a borrowing facility, or a checkbook.
Interest rates differ significantly?"from fixed rates of 6-12 months to trackers aligned with the base rate. The interest rate can also vary depending on how much you borrow relative to the property’s value.
Is It Right for You?
Understanding the concept is simple, but calculating potential benefits requires professional advice. Consult an independent mortgage adviser to see if an offset mortgage suits your financial situation. If you have substantial savings and pay higher tax rates, an offset mortgage could be a winning choice.
Figures correct as of 11/05.
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