Introducing offset mortgages
Will using your savings ease your mortgage costs?
Could an offset mortgage help your savings work harder for you?
Mortgage market view
In February the Bank of England’s monetary policy committee increased the Base Rate1 by 0.25% to 0.5%. They noted that inflation could rise as high as 7% and indicated further Base Rate increases this year are likely.
Since then we've seen a knock-on effect on our mortgages rates, which have increased steadily. For example, our fixed-rate mortgages in October 2021 started from 0.91%; they now start from 1.94%. The Office of National Statistics’ latest report finds that house prices were up 10.8% in the year to December 2021.
Liam Boardman, Senior Wealth Mortgage Specialist, says, “From our perspective, the combined pressures of increased rates, higher inflation, and rising prices have marked a significant shift in demand from the start of 2021 to 2022. The majority of our clients are now looking to refinance rather than move house.”
With demand for refinancing growing and the fact that we are close to the UK tax year-end, we wanted to highlight one of the lesser known mortgages – the offset mortgage.
What is an offset mortgage?
Offset mortgages link your home loan to your savings accounts and use your cash savings balance to reduce the interest on your mortgage. This means your mortgage’s interest payments are “offset” by the total balance you have in your linked accounts. With an offset mortgage, the cash accounts you have linked to your mortgage won't earn you interest – instead they can help reduce the interest you would have to pay for your mortgage.
How can an offset mortgage help me save money?
Boardman says that more people could consider offset mortgages as more people have managed to save more money during the coronavirus crisis.
“One of the side-effects of the protracted pandemic was that many people managed to build up a significant pot of lockdown savings,” says Boardman. “For some, these cash deposits could be linked to an offset mortgage, thereby potentially lowering their monthly payments or reducing their mortgage term.”
An example of an offset mortgage in action would be if you have a mortgage balance of £500,000 and choose to offset £100,000 in savings, you'll only be charged interest on £400,000. As the mortgage interest is charged on £400,000 instead of £500,000, you could lower your monthly payments or keep your monthly payments as they were and shorten your mortgage term.
Boardman admits that one of the most common questions clients have about offset mortgages is whether, once they link their savings accounts, they are still able to withdraw money from their savings.
“Having an offset mortgage doesn't limit your access to your linked savings,” says Boardman. “You retain full, unrestricted access to your money and can make withdrawals at any time. However, if you lower the balance of a linked savings account, your monthly payments for your offset mortgage will go up. However, as interest is calculated daily2, even savings held for a few days will reduce the mortgage interest charged.”
Although interest rates are rising, they remain at historical lows. Boardman says that during times of low interest rates, offset mortgages are often attractive to people with cash savings.
Boardman adds: “You may find your savings work harder for you with an offset mortgage. This is because mortgage interest rates are usually higher than the rates you can get on your savings accounts. For example, if your mortgage rate is 4%, your savings and current account balances would be offsetting the mortgage interest at that rate.”
The main characteristics of an offset mortgage
- If you maintain a balance in your linked current and savings account (you can only link to a Barclays UK sterling onshore account), you can reduce your monthly payments or if you overpay each month you can pay off your mortgage sooner
- An offset mortgage usually deducts more interest than you’d usually gain on your savings
- You can still access your savings at any point
- You do not receive any credit interest on the surplus savings
- As no interest is earned on your linked current and savings account, there is no tax to pay on savings interest received
What interest rate will I pay?
All Barclays Offset Mortgages are tracker mortgages and so the interest rate is variable. Most of our trackers change in line with the Bank of England Base Rate, which is a variable rate set by the Bank of England. Current rates are available online, on the telephone, or you can find out more from a Barclays mortgage adviser.
Things to consider
Your home may be repossessed if you do not keep up repayments on your mortgage.
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