The offset mortgage is probably the best-kept secret for those who are looking for a mortgage but have significant savings or have the ability to make regular overpayments.
This is how it works. Fundamentally the mortgage is like any other mortgage. Generally, you will take a capital and interest mortgage over a period of time say 25 years. You will add on a specific product such as a fixed rate or tracker rate for a period of time whether that be 2 years or 5 years. So that is exactly the same as any other mortgage.
Here’s the difference.
Let’s assume that you wanted to take out a £100,000 mortgage and you have savings of say £20,000 which are not required to put towards the purchase price. A normal mortgage would charge you interest and if it was a capital and repayment mortgage then part of the monthly repayment would be a capital sum. With an offset mortgage, you open an offset savings account and place the aforementioned £20,000 into this account which is in essence linked to your mortgage. Here is the clever bit. When the lender calculates how much interest you pay on a monthly basis, it works this out not on the current balance but the current balance less what is in your savings account. The amount of savings are deducted from the amount that you have borrowed which means that interest is only chargeable in this example at £80,000. Assuming that you continue to pay the same monthly amount it, therefore, means that you will be charged less interest so more of your monthly payment will be used to repay the capital.
If you keep an offset mortgage for long periods of time then the compound interest effect kicks in. Ultimately this will shorten the length of your mortgage.
The effect is the same if you make deposits into your offset savings account. On the basis that you have taken your mortgage over a specific period of time then any overpayments will be used to repay the capital. Every month thereafter there will be less interest to pay on the basis that you have made an overpayment and overtime this compounds up.
If I had my time over again then I would ensure that I would either seriously consider an offset mortgage but definitely make overpayments.
The one caveat I would have is that if you have a significant amount of savings then you need to be wary of the limit of the £85,000 guarantee offered by financial institutions
One of the side benefits of an offset mortgage is that it gives a huge degree of flexibility.
Let me explain
Many of my landlord clients have used the offset facility to remortgage and capital raise funds from the residential mortgage. With the capital-raised funds, they place these in the offset savings account until they are ready to utilise the money to either buy a buy to let property outright or use the money for a deposit. They then have either a deposit or the full purchase price ready and waiting and do not have to pay interest on the additional funds - you do though have to make capital repayments!
The other huge benefit is that if you make deposits into the offset savings account then you get the same benefit as if you made direct overpayments to your mortgage. The benefit of paying into the offset savings account is that you can treat that as a savings account and uplift those monies if you need to. If you had a standard mortgage and made overpayments then you would have to remortgage to get those out.
Here are some of the lender's offset calculators so you can have a play around with them.
Happy to have a chat to explain it further and let you know what options you have.