Over the last decade, the offset mortgage market has experienced exponential growth. Low savings rates combined with increased consumer awareness have pushed offset products into the mainstream, after years of relative obscurity. However, many potential borrowers are still left with questions: What are the benefits of offset mortgages? Who can benefit from this type of mortgage? Let’s take a look at the advantages of offset products, and see which groups of people could derive the most financial benefit from them.
Interest Savings and Tax Benefits
An offset mortgage is a unique product that allows borrowers to enjoy both mortgage interest savings and tax advantages. It’s a type of mortgage that involves connecting a conventional mortgage with one or more savings accounts. Whatever balance is in the savings accounts earns no interest, but instead is used to offset the mortgage. When each mortgage payment is made, the interest is determined by the principal remaining in the mortgage account, minus the amount of the offset. Since most interest rates are higher than current savings rates, the reduction in mortgage interest usually outweighs any lost interest you would have earned on your savings.
Offset products also offer tax benefits to borrowers. With a traditional savings account, you’d have to pay tax on any interest you earn. Offset mortgages, however, work a bit differently. Since you only pay interest on the difference between your mortgage amount and your savings offset, the savings that you put in is essentially earning a return set at the mortgage rate. There’s no tax to pay on this benefit, so offset mortgages effectively give borrowers a tax-free return on their cash. This can have a real impact for higher-rate taxpayers.
Instant Access to Cash
Some people assume that overpaying on a traditional mortgage offers the same benefits as an offset mortgage. While both can accomplish the same goal of shortening a mortgage term, there are distinct differences. The biggest advantage of an offset mortgage over regular overpayments is the access to cash. When you overpay on a traditional mortgage, it’s usually impossible to get that money back in the event of an emergency. Offset mortgages are flexible: You can withdraw from your offset amount at any time. You can also add to the offset amount as time goes by, which is why potential borrowers shouldn’t feel they need to wait until they’ve saved a large lump sum to get an offset mortgage. It’s possible to start with a relatively modest sum and simply add to it as you accumulate savings.
Offset mortgages have traditionally been popular among older individuals with higher incomes. However, a relatively new offset product called a "family offset" can help younger householders enjoy the advantages of an offset mortgage. With this product, family and friends can link their savings accounts to the borrower’s mortgage. The money is still entirely theirs to access, but the borrower gets the benefits of the reduced mortgage interest. This enables parents to help out their adult children, whilst keeping control of their money. No matter what the situation, a family offset is an effective way to use a family member’s savings to lower the balance on another family member’s mortgage.
Options for Landlords
Individuals who own properties for investment purposes can also benefit from offset products. Landlords, who typically utilise what’s known as a "buy-to-let" mortgage, can take advantage of a special buy-to-let offset mortgage. Using this type of mortgage, property owners can roll their rental income into a linked account, and use that income to further offset their mortgage.
It’s clear that offset mortgages have a broad appeal. The savings on mortgage interest, combined with tax advantages, can benefit most householders and landlords. They’re also an attractive option for the self-employed as the money they set aside for taxes can be used as an offset in the interim. Whether you’re a high earner looking for tax benefits, or a young borrower taking advantage of a family offset, there’s an offset mortgage product that’s right for you. It’s wise to speak to an adviser or independent mortgage broker, who can steer you to the best mortgage deal for your individual needs.