Reduce your mortgage payments with an offset mortgage
By Rhys Edwards
With the current market conditions, we always look for ways to save our clients money. I am currently asking a lot of clients about their savings when they are meeting with me to sort their remortgage, as there are ways to use savings to reduce your mortgage payments without locking away those savings.
When clients seek avenues to reduce their mortgage payments, one compelling option to consider is an offset mortgage. An offset mortgage is a valuable tool for clients with savings sitting in an account. Offsetting allows a client to reduce either the monthly payment they pay or the mortgage term; both options are available by using their savings.
So how does it work?
The concept is quite straightforward, for every £1 a client places into their offset savings account, they effectively avoid £1 in interest charges for that particular month.
An offset strategy can offer some considerable savings, as illustrated in the following scenario with Paul:
- Paul has a £300,000 mortgage over a 20-year term
- He has £50,000 in savings and saves an additional £200 per month in his savings account
Here are Paul’s offset mortgage options:
Option 1: Paying the mortgage off faster…
2-year fixed mortgage rate at 6.44%
Offset rate (reducing the term) with a monthly payment of £2,226. Paul’s mortgage will be paid off in 15 years and 6 months
Saving Paul £100,428 in interest charges!
Option 2: Reducing the monthly payment…
With Paul’s scenario, the savings would reduce the contractual monthly cost to £1,962 per month
They would reduce further as more savings are added to Paul’s offset savings account
Here is a non-offset mortgage comparison for Paul:
- 2-year fixed rate of 5.99% with a monthly payment of £2,148
- You can overpay this mortgage which is typically limited to 10% per month with most banks, but once an overpayment is made, the funds are paid off the mortgage, and most mortgages cannot be taken out of the mortgage
- The client would need to apply for a further advance if further funds were required
As you can see in the above scenarios, an offset mortgage is a fantastic option for clients with savings and looking to reduce their monthly outgoings.
They are also a fantastic option for clients receiving an annual bonus or inheritance, as in the current market with rising interest rates; this can offer significant savings for clients.