Is an Offset Mortgage right for YOU?
If you’ve read some of my previous blogs, you may know we have a holiday home by the sea in Spain.
I’m looking out of the window at home right now, as I write this, and the weather is miserable.
I mean not just raining but the dull, grey and wet kind of miserable.
I find this time of year so depressing. And it is NOT helping that right now, I don’t even have any heating! 🙁
To cheer myself up, I thought I would write this blog about how we financed our holiday home with an offset mortgage, to remind me that it won’t be long until spring.
We had always dreamed of buying a holiday home in Spain but it was just that, a dream, until we went on holiday last year.
We had a look around and found a house we wanted to buy and needed to finance it in a hurry!
We raised the additional money we needed against our house in the UK by increasing our residential mortgage and bought the property outright. Because it was a further advance on our current mortgage, rather than a re-mortgage with a new lender, the money was available really quickly which helped ensure we had the funds ready when we needed them .
We have an offset mortgage. “What is that, exactly?” I hear you ask!
Many people find offset mortgages confusing to begin with but they are actually pretty straightforward. The idea is that your savings and your mortgage are combined into one.
Mine has a separate mortgage account and an associated savings account.
Any savings in the account are offset against the mortgage. In other words, the savings could be considered to be a temporary overpayment of the capital (because we have access to the savings at any time).
Interest is only charged on anything which is NOT offset against savings.
So my monthly mortgage payments (which assume I’m paying interest on the whole balance) will used to overpay some of the balance.
As an example, if you have a mortgage of £100,000 and have savings of £20,000 in the one account, the savings are offset against the mortgage and you would only pay interest on £80,000.
The mortgage payments assume (in my case) that I have no savings so interest is charged on £100,000. Because I don’t need to pay interest on the £20,000 (because I have the savings offsetting this amount of my mortgage) the surplus interest is used to overpay the balance.
And because savings are considered to be a temporary overpayment (unlike conventional overpayments to your mortgage account), I still have access to my savings if I need them.
Although I don’t earn any interest on the savings, I SAVE interest (ie interest I would pay on my mortgage) at the interest rate charged on my mortgage.
Pretty cool, eh?
Offset mortgages can be really useful for people who get varying levels of overtime, commission and bonuses, for the self-employed or for landlords receiving rent.
You can put all the surplus money into the offset account but it’s easily accessible at any time. Potentially, you can make a big saving on your interest and, in general, the savings you make are way more than you would make if you left the money in a normal savings account. Especially, at the moment.
Remember though, that your savings are only offsetting the interest.
You still need to repay the loan in full. Also, offset mortgages tend to have a higher interest rate, so if you don’t have savings, it may not be the best option for you. A mortgage advisor can help you to work whether an offset mortgage would be a benefit.
Anyway, I digress (again!)
We took a further advance on our residential mortgage and put it into the offset account until we needed it.
That meant, for a few weeks, we were only paying interest on the original part of the mortgage. The interest that we would have paid on the extra borrowing, we used to reduce the capital. The additional borrowing was offsetting itself.
All we need now is some sunshine and relaxing of the travel restrictions and we are set for the summer!
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
Get in touch:
Heide Swift DipFA, CeMAP, CeRER