Offset Mortgages
An offset mortgage is a great way to make your savings work for you, especially if you are earning low interest rates on your savings. With an offset mortgage, your savings are used to reduce the interest charged on the balance of your mortgage, effectively meaning that your savings are earning interest at the same rate that you are being charged on your mortgage (normally a higher rate than you would get in a normal savings account). Use our offset mortgage tool to see how much money you could save:
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Using the Offset Mortgage Tool
Enter the amount you would like to borrow into the "Mortgage Amount" field. Remember that most lenders will not allow you to borrow the whole cost of your house - they normally ask you to have a deposit, typically 10% or more of the value of the house. By default, our tool applies an interest rate of 5%, but the rate charged will actually vary fron lender to lender, and will often depend on how much you want to borrow and the size of the deposit you have. Change this rate to see what effect a change of interest rate would have on your monthly repayments. Typically, mortgages have a repayment term of 25 years. If you are able to shorten this term, your monthly repayments will be higher but the total amount repaid will be lower (unless your lender charges a fee for early repayment). Enter the amount of savings you would start with in the "Starting Savings" field, and the amount of extra savings you could make each month into the "Additional Monthly Savings" field. Then select whether you are interested in a Capital Repayment or Interest Only mortgage.
The mortgage repayment tool provides an estimate of the monthly payments and total amount repaid based on the information that you enter. In this tool, interest is calculated monthly, but lenders may assess interest more frequently, which will lead to different figures. Also, be aware that lenders may have additional fees which are added to the cost of the mortgage - for example, a product fee or application fee applied at the start of the loan (often added to the mortgage) or a fee on completion. Such fees are not included in the figures provided by this tool.
Paying Off a Mortgage Early
If you have a repayment mortgage (one where your monthly payments cover not only the interest on the outstanding balance, but also reduce the balance so that you repay the full amount by the end of the mortgage term), you can use offsetting to pay back the balance of your mortgage quicker, reducing the total amount of interest you pay. You do this by using your savings to reduce the interest your lender charges each month but keeping your monthly repayments the same as they would be without offsetting - the effect of which is to pay off your mortgage more quickly.
Reducing Your Mortgage Balance
If you have an interest-only mortgage (one where you only pay the interest on your loan each month, and do not reduce the amount you owe), you can use offsetting to reduce the outstanding balance of your mortgage, reducing the total amount of interest you pay. You do this by using your savings to reduce the interest your lender charges each month but keeping your monthly repayments the same as they would be without offsetting - the effect of which is to reduce the outstanding balance on the loan. This further reduces the amount of interest the lender charges you, so you reduce the balance even quicker. At the end of the mortgage term, you no longer have to repay the full amount, but an amount reduced by your offsetting.
Reducing Your Monthly Repayments
With either a repayment mortgage or an interest-only mortgage, you can use your savings to reduce the amount your lender charges you each month. You keep the same repayment period, and in the case of interest-only mortgages, the balance repayable at the end remains the same. However, because the lender is charging you less interest each month, your monthly repayments are lowered, saving you money over time. Your lender will reduce the amount of interest they charge you each month by the amount of interest your savings would earn at the same rate. Since the lender won't let your savings earn more interest than is charged on your mortgage balance, the interest charged will never go below zero (i.e., you will never earn extra interest).
With a repayment mortgage, at the start of the mortgage term the bulk of each monthly repayment is interest - but at the end of the term, only a small proportion of each month's repayment is interest and most of it is going to capital repayment. This means that the capital repayment portion increases each month - and when your savings reach a level where they are cancelling out all the mortgage interest, your mortgage payments will start to increase along with the capital repayment.
When Your Savings Reach Your Mortgage Balance
If you add to your savings each month (or even if you don't), your savings may at some point be greater than the amount of money you owe on your mortgage. At this point, you can use your savings to repay your mortgage early (although early repayment charges may apply - check with your lender). If you choose to continue making payments on your mortgage, think about what to do with your additional savings. Most lenders will not let you earn interest on savings balance above your outstanding loan balance - so your money is not working for you. It is a good idea at this point to consider putting any additional savings in an interest-earning account.