Save thousands with an offset mortgage

September 13, 2016 by Brendan O'Neill

Advice & Tips

If home owners have savings, they can use them to save thousands on their mortgage repayments, with an offset mortgage.

This type of mortgage will use any savings to pay off some of the outstanding loan to reduce the amount a borrower pays interest on. As interest rates are at their lowest levels, savings deposit accounts won’t pay very much in the way of interest, making an offset mortgage an attractive option.

If you have a lump sum in your savings account, you could apply for an offset mortgage so that you pay less interest on the amount owed on your home, while reducing the length of the mortgage term.

For instance, if you have £20,000 in savings but owe £80,000 on your mortgage, the lender will use the savings to reduce the amount which attracts interest. You will only be charged interest on the outstanding £60,000. The thousands saved will generally be greater than the amount of interest earned in an average instant access savings account.

According to Andrew Montlake, from the mortgage broker Coreco, offset mortgages are excellent news for anyone who has savings which they can afford to use to reduce their mortgage. If you don’t have a savings account, you could make overpayments every month so that the outstanding balance is reduced.

Most lenders are willing to let you overpay around 10% of the balance each year, although amounts vary among lenders. With interest rates so low, it makes financial sense to overpay on the mortgage rather than save. Mortgage advisers gain knowledge of offset mortgages and overpayments during their CeMAP training course.