How do offset mortgages work

You can choose one of the following:. Lower repayments each month, which saves you money in the short term. A shorter term but the same repayment amount. This pays off your mortgage quicker, which means you pay less interest and less overall to clear the balance. Repayments that go down every year, assuming the interest rate stays the same.

The main difference between current account mortgages compared to offset mortgages is that instead of having two accounts, your mortgage and current account are merged into one. Your mortgage is held in an account with a negative balance that you can pay your wages and savings into. You can spend the money you pay in, but while it is in your account it will reduce the balance you are charged interest on.

However, while current account mortgages can help you pay off your home loan faster, seeing a negative balance all the time can make things a little confusing. Some lenders let you link your friends' or family's savings accounts to your offset mortgage as well. Their savings will earn no interest, but they will reduce the interest on your mortgage. They can withdraw their savings whenever they want. This means a family member or friend can help make your mortgage cheaper without having to give you any money.

Mortgage rates are usually much higher than savings rates, so the savings you can make on mortgage interest are higher than the return you could get from a savings account. Interest on your savings is taxed once you earn more than a certain amount. However, the money you can save with an offset mortgage is not taxed, so it could be more tax efficient than using a normal savings account.

Offset mortgages are even more tax efficient for higher rate and additional rate taxpayers because they would pay more tax on their savings interest. How tax works on the interest on your savings. You can compare offset mortgages using our offset mortgage comparison. Our tables will list the best offset mortgage rates available on the market.

Once you have found the mortgage you want, you can apply directly through the lender. Offset mortgage rates are sometimes higher than standard mortgages, so check if you could save more by getting a cheaper normal mortgage and a savings account.

You can calculate your monthly repayment and how much you could save. Enter your mortgage balance and term, savings balance and interest rate into an offset mortgage calculator. Compare this to the amount you would pay on a normal mortgage and the interest you could get on your savings balance and you will be able to decide if an offset mortgage is right for you. If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.

Bad credit mortgages. Cashback mortgages. Discount mortgages. Flexible mortgages. Guarantor mortgages. Help to buy mortgages. Interest only mortgages. You may learn more about financing from the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Investment Banking Course. Login details for this Free course will be emailed to you. Forgot Password? Article by Madhuri Thakur. Offset Mortgage Meaning Offset mortgage can be defined as the type of the mortgage where the saving account of the person is linked with its mortgage thereby offsetting the balance between the accounts and this arrangement helps the person in reducing the interest payment because the rate of interest to be paid on the mortgage is substantially higher when compared to a rate of interest which is to be received on the savings account, thus providing a net benefit to the borrower.

Explanation If any person takes the mortgage from a financial institution Financial Institution Financial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads.

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How Does an Offset Mortgage Work? Do I Need an Offset Mortgage? Alternatives to an Offset Mortgage. Offset Mortgage vs. Traditional Mortgage. Pros and Cons of an Offset Mortgage.