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If you are a homeowner with savings, you could protect yourself from rising interest rates by using an offset mortgage.  However, is this the right option for you?  What are the advantages and disadvantages?  Let’s take a closer look at offset mortgages and learn more about how they work.

 

How Does an Offset Mortgage Work?

An offset mortgage allows you to use your savings to reduce the length of your mortgage.  You will be able to link your savings to your mortgage, which will save you thousands in mortgage interest and shorten your term.  You will still be able to access your savings when you need them, but you won’t have to pay tax on them because they won’t be earning interest.

For example, if you have a mortgage for £150,000 and you have £30,000 in savings, you will be able to use the savings to offset the mortgage and you will only pay interest on the £120,000 left over and above your savings.

 

What are the Advantages?

There are a number of advantages to using an offset mortgage.  One perk is that they can be much more flexible and offer more options than traditional mortgages.  You will have the ability to take a payment holiday and make unlimited overpayments, which will allow you to reduce your outstanding mortgage.  There is also no limit on how much of the mortgage you can pay off per year.

Depending on the economic environment, you will be able to get a better rate on your savings than you would be able to get elsewhere, because you are not paying taxes on your offset rate.  Also, interest on this mortgage is calculated daily, so you will be able to enjoy an immediate benefit as soon as you make an overpayment.

As well as helping you to become mortgage-free sooner, offsetting can also save you tax.  In most cases, you will pay income tax on the interest that you earn on your savings.  However, if you don’t earn any interest because the money is offset against your mortgage, you will not need to pay tax.  This can be a very attractive option if you are a top-rate taxpayer.

Some people choose to use a standard mortgage and use their savings to pay a large portion of it off.  However, if you do this it will be difficult to access the money again when you need it.  When you have an offset mortgage, you will be able to access your savings at any time if you need them.

 

Disadvantages

Of course, there are disadvantages to an offset mortgage as well.  In some situations, you might be able to get a better deal on your savings somewhere else, so it is a good idea to check the rates before you put that money against your mortgage.  Sometimes the interest rates on these mortgages are higher too, because of the extra flexibility you are afforded.

Also, some people are uncomfortable with having all of their money in one institution, so you will need to assess whether you feel okay with this.  If your bank went bust, the slightly scary thing is that your savings would not be protected by the Financial Services Compensation Scheme because they were used to offset your mortgage.

 

Is an Offset Mortgage Right for You?

How do you know if an offset mortgage is right for you?  Usually, this type of mortgage is ideally suited to those who have a decent amount of money in savings.  You will need to have at least £12,000 to £15,000 in your savings account in order to reduce your mortgage rate by 0.5%.

An offset mortgage is also ideal for self-employed people, because it allows you to save for your tax bills alongside your mortgage.  Also, if you regularly get large bonuses this can be a great option for you, because you will still have access to your funds if you ever need to use them.

The best way to determine whether or not an offset mortgage will work for you is to use an online calculator, which will take a look at your spending habits, salary, savings and other factors to assess your eligibility.  You can also ask Clydesdale Bank for more information.  Take the time to assess your options and make sure that you are choosing a mortgage that works for your needs.