Ian Biggs, Head of Product Performance at Coventry Building Society, explains the benefits of offset mortgage for people looking for flexibility with their mortgage while saving tax-free.
An offset mortgage is a great option for borrowers looking for more flexibility and a smarter way to manage both their mortgage and their savings. Here’s why it could be worth considering:
Keep access to your savings while making your money work for your mortgage
One of the standout benefits of an offset mortgage is that you can still access your savings whenever you need them, while also reducing the amount of interest you pay on your mortgage. How does that work? Your savings are linked to your mortgage, and instead of earning interest on those savings, they reduce the balance of your mortgage that’s charged interest. So, if you have £20,000 in savings and a £200,000 mortgage, you’ll only pay interest on £180,000. The best part is you can dip into those savings whenever you want, making it a great option for people who want to keep an emergency fund handy.
Reduce your monthly payments or pay off your mortgage faster
Another major benefit is that you can choose how to use the savings offset: to lower your monthly payments or to shorten your mortgage term. If you’re focused on reducing your monthly outgoings, the savings offset can help you cut down your regular mortgage payments, giving you more breathing room in your budget. On the other hand, if your goal is to become mortgage-free sooner, you can keep your payments the same but pay off the loan faster by reducing the interest you owe.
It’s a tax free way to save
With a regular savings account, you pay tax on the interest you earn once you’ve gone over your tax-free savings allowance. But with an offset mortgage, you don’t earn interest on your savings – you’re using them to cut down the mortgage interest. This effectively lets you “earn” a tax-free return, as the money you’re saving on mortgage interest would likely exceed what you’d make in a taxed savings account. This is particularly appealing if you’re a higher-rate taxpayer, as the savings can really add up.
Flexibility and security
Offset mortgages offer a lot of flexibility. If you have a fluctuating income, like if you’re self-employed or freelance, using the offset savings is a great way to reduce your mortgage costs when you have more cash on hand but you still have access to that money if things get tight. Plus, many lenders offer fixed-rate offset mortgages, so you get the benefit of predictable payments even if interest rates rise, while still enjoying the flexibility that comes with the offset feature.
In summary
An offset mortgage gives you the best of both worlds – access to your savings and the ability to reduce your mortgage interest. You can either lower your monthly payments or pay off your mortgage quicker, all while saving tax-free. It’s a smart option for anyone with a decent amount of savings, especially if you want the flexibility to access your funds when needed while saving money in the long run.
