Anderson HarrisMarket Insight
How offset mortgages are helping those with cash reserves navigate the current high interest rates
Published: 6th October 2023
This Article was Written by: Adrian Anderson
While the recent announcement by The Bank of England to hold the base rate at 5.25% was welcome news, interest rates are still high compared to recent years.
Increasingly, we are responding to many questions about offset mortgages from those with significant cash reserves. These products offer a helpful alternative to using cash savings to pay off a portion of your mortgage early. They are particularly appealing to mortgage holders who may still need access to their cash savings in the future.
What are offset mortgages?
An offset mortgage links your current and savings accounts to your mortgage. Around half a dozen lenders are offering this product, which offsets the total balance of the linked accounts against the amount owed on the mortgage each month. In doing so, mortgage interest is only usually payable on the difference between the mortgage amount and the balance in the current account.
With these products, you have to have your offset mortgage and savings with the same provider. Offsetting also means that, while you won’t earn interest on the current and savings accounts when linked to the mortgage, there are some significant benefits. For example:
- Lowering the amount of interest charged on your mortgage
An offset mortgage can lower your monthly payments or reduce your mortgage term. If you have a mortgage balance of £200,000 and offset £100,000 in savings, you will only be charged mortgage interest on the remaining £100,000. This saving could be used to lower your monthly payments or shorten the mortgage term.
- A more tax-efficient solution (if the higher interest rates mean you now face more tax on your savings’ interest)
The tax due on savings impacts the net return you gain on your savings, especially when interest rates are higher. This can mean some mortgage holders with significant cash savings face a higher tax bill for the interest income they receive on their savings. With offsetting, you don’t earn interest when your current and savings accounts are linked to your offset mortgage, but you do offset the mortgage interest.
- You can still access your savings
Your savings are held in a separate account as part of an offset mortgage arrangement. Your savings in that current account will reduce the interest you pay on your mortgage. If your savings’ balance matches your mortgage balance, you may not have to pay any interest on your mortgage balance. You can still access your savings when you need the money, so you still have access to liquidity.
Who is benefitting from offsetting?
Offsetting is helping many people who have savings. These include professionals who receive bonuses, entrepreneurs who need fast access to their savings, those saving long-term for school fees, and the self-employed who have a fluctuating income and might be saving for a tax bill.
Things to bear in mind
As we mentioned, you must have your offset mortgage and savings with the same provider. Offset mortgages often have a higher interest rate, however when comparative savings’ interest rates and tax charges on interest income are taken into account, many homeowners find they make sound financial sense.
Talk to our team of specialists
We have strong relationships with offset mortgage product providers and many years of experience helping homeowners find the best product for their circumstances. With mortgage interest rates unlikely to fall significantly for many months, do chat with us about how your savings could help to reduce your monthly payments or mortgage term.
Contact our team of specialists on tel. 020 7495 6633 or email email@example.com.