5 Advantages to Swapping to an Offset Mortgage When You Remortgage
Offset mortgages have been around in the UK for more than 20 years, but many people have steered clear of them because they think that they are difficult to understand. Another myth surround them is that they are only suitable for people who earn a lot of money, but this is not true.
We have put together this guide to show you how you could gain from an offset mortgage, and to help you to understand what they are all about and that they are not as complicated as many people believe.
1. Save On Interest: Offset mortgages are made up on the mortgage loan itself, and a savings account which is linked to the mortgage and used to offset the outstanding loan. Any funds held in the savings account will be offset against the loan, and you will then only have to repay interest on the loan amount minus the savings.
2. You Can Take Payment Holidays: Often you may be able to take a break on repayments for a certain period of time. You are also able to withdraw from your savings account whenever you wish, for example if there was an emergency.
Some lenders will also allow you to utilise variable monthly repayments, so that if you’ve overpaid for some time, you may then be able to underpay for a short period or take a payment holiday., meaning that you would not have to make repayments for a month or two.
3. You Can Repay the Mortgage More Quickly: The larger your savings balance becomes, the less interest you will pay on your mortgage because interest is only due on the outstanding mortgage balance minus the savings amount. This means that your repayments will be lower each month.
However, if you decided to keep your monthly installments level and not reduce them, you would be paying larger amounts off the outstanding loan amount so the term of the mortgage would be shorter than it was before.
4. Make Use of The Savings Facility: Since the ‘credit crunch’, which began three years ago, interest rates have fallen to a record low due to the low rate set by the Monetary Policy Committee within the Bank of England. For that reason, savings accounts have been earning very little interest, but by using your savings account to repay your mortgage earlier, you’ll be putting your savings account to good use.
5. Reduce Your Tax Bill: Tax is payable on your savings interest if you’re a taxpayer, and at the higher rate it’s 40%. But when you use a savings account to repay your mortgage, there is no tax due on the savings account.
An offset mortgage is only advantageous if you use them as they are intended, and if you have no savings or no disposable income to save then there is little point in opting for one.
Timothy Frodsham writes for Just Commercial Mortgages.com the UK’s No.1 site for the latest commercial mortgage rates and commercial property finance news.