There are several advantaged to getting an offset mortgage. You can pay off your debt earlier and get a lower interest rate. You can also reduce the amount you pay each month. An offset mortgage means your mortgage is combined with your savings account, and the savings account offsets some of the balance owed on your mortgage. This reduces the overall amount of your debt that is assessed for interest purposes. You pay a lower amount of interest over the life of the mortgage. To get this benefit, the amount in your savings account needs to stay more or less constant.
There are some things to consider before choosing an offset mortgage. If you have a large, stable savings account, an offset mortgage may be suitable for you, but, remember, you will not be earning interest on your savings account once it is used to offset a mortgage. However, your savings account is still liquid, so you can withdraw money if needed. The amount you leave in the account will still apply to offset your mortgage. Basically, you get to keep your money and spend it at the same time. It is buying you a lower interest rate for your mortgage, and you get it all back in the end. This is called getting your money to work for you.
If you are a higher-rate or an additional rate taxpayer, then an offset mortgage can be to your advantage. The interest you earn on your savings account is taxable income, but the reduction on the interest you pay for your mortgage is not. This is why many banks and lending institutions market offset mortgages as Tax Efficient savings. Studies done by some lenders show that people with offset mortgages pay their mortgages off more than eight years earlier than standard mortgage holders. This means eight years off your interest payments.
Parents, or other relatives, can help their children reduce their mortgages too. The parent’s savings is used to offset the mortgage debt of the child. The child will pay interest only on the part of the mortgage that is not offset. The parents will not get interest on their savings account, but they get the benefit of not paying tax on that interest. This is a big help if you are a high-rate taxpayer.
Flexibility is another advantage of an offset mortgage. It is especially useful for self-employed people who have more income at certain times of the year. You can make more payments at that time and less at the times of the year when your receipts are reduced.
The main drawback of offset mortgages is the high interest rates. They are higher than the rates for standard mortgages. Also, if your savings account is getting a high rate of interest, it may not be worth it to go for an offset account. If you are thinking about getting an offset mortgage, do some research, and possibly get the advice of a professional. With fluctuating interest rates, you need to be sure you are making the right decision for your unique financial situation.