Understanding Offset Mortgage Products: A Guide to Making Your Money Work Smarter
The generic way offset mortgage facilities work is simple. A savings account (called an Offset Deposit Account) will be set up alongside your mortgage.
Any savings you have in your Offset Deposit Account will now “offset” against your mortgage.
Like any other savings account, you can deposit or withdraw funds anytime. While you won’t earn any interest on the savings in your Offset Deposit Account, you won’t be charged any interest on the same amount of money in your mortgage.
So, by linking your mortgage with your Offset Deposit Account, it will take the balance of your savings away from the outstanding balance of your mortgage and only charge you interest on the net amount.
The exact workings of the scheme will be specific to the mortgage lender, so these should be discussed with your professional mortgage adviser, such as Niche Advice.
You should also consult with professionals from a Tax Advice and Financial Planning perspective.
Target market
New and existing Mortgage holders with the following, but not exhaustive characteristics:
- Regular savers
- Those with inheritance
- Redundancy, back in employment
- Bonus based income
- Divorce settlement
- Bonds that have or will mature
- Anyone with regular surplus money left in your account at the end of the month
Other benefits
- It can be tax efficient, but you should seek professional Tax Advice.
- Your money is not locked away – easy access is to funds if needed!
Choices
There are two main forms of using the Offset either a Lump Sum Deposit or Regular Deposits. They can be used in tandem. Regular savings do not have to be put in every month, but it’s a good habit to get into.
You have the option of applying the benefit to reduce your mortgage payments or decrease the term of the mortgage. The term reduction has the biggest impact as borrowing money over a longer period adds to the overall cost.
How does it look in practice?
These examples are for illustrative purposes only and should not be relied on to be exact.
This is based on a Property value of £500,000. The repayment mortgage is £350,000 over 25 years, and reference the Scottish Widows Flexible Mortgage with Offer. 5.54% fixed until 30/4/2029, reverting to a variable rate, currently 8.74%. The overall cost for comparison is 7.49% APRC.
Every case needs to be discussed and approved individually.
Lump Sum Deposit
Example 1: Depositing your £35,000 Offset savings from day 1 of the mortgage.
Reduced term option: You’ll save £164,881.54 and reduce the term of your mortgage by 4 years and 11 months. Reduced payment option: You’ll save £69,141.34 with reduced monthly payments.
Example 2: Depositing your £50,000 Offset savings from day 1 of the mortgage.
Reduced term option: You’ll save £211,295.70 in interest and reduce the term of your mortgage by 6 years and 4 months. Reduced payment option: You’ll save £97,700.64 with reduced monthly payments. These are displayed in the diagram below.
Regular Deposits
Example 3: Deposit £100 every month into your offset savings from day 1 of the mortgage.
Reduced term option: You’ll save £62,910.49 in interest and reduce the term of your mortgage by 1 years and 10 months. Reduced payment option: You’ll save £31,286.40 with reduced monthly payments.
Example 4: Deposit £100 every month into your offset savings from day 1 of the mortgage and overpay your mortgage account by £50 a month.
Reduced term option: You’ll save £87,380.10 in interest and reduce the term of your mortgage by 3 years. Reduced payment option: You’ll save £41,016.76 with reduced monthly payments. These are displayed in the diagram below.
Lump Sum with Regular Deposits
Example 5: Depositing £50,000 in a lump sum day 1, £200 every month into your Offset savings from day 1 of the mortgage, and overpaying your Mortgage Account by £100 a month.
Reduced term option: You’ll save £268,497.63 and reduce the term of your mortgage by 8 years and 8 months. Reduced payment option: You’ll save £166,946.61 with reduced monthly payments. These are displayed in the diagram below.
Summary Table – Reduced Term
| Lump sum into Offset Account | Regular into Offset Account | Overpayment of the Mortgage Account | Term reduction | Interest saved |
|---|---|---|---|---|
| £35,000 | £Nil | £Nil | 4 years and 11 months | £164,881.54 |
| £50,000 | £Nil | £Nil | 6 years and 4 months | £211,295.70 |
| £Nil | £100 | £Nil | 1 years and 10 months | £62,910.49 |
| £Nil | £100 | £50 | 3 years | £87,380.10 |
| £50,000 | £200 | £100 | 8 years and 8 months | £268,497.63 |
Summary Table – Reduced Monthly Payments
| Lump sum into Offset Account | Regular into Offset Account | Overpayment of the Mortgage Account | Term | Interest saved |
|---|---|---|---|---|
| £35,000 | £Nil | £Nil | 25 years | £69,141.34 |
| £50,000 | £Nil | £Nil | 25 years | £97,700.64 |
| £Nil | £100 | £Nil | 25 years | £31,286.40 |
| £Nil | £100 | £50 | 25 years | £41,016.76 |
| £50,000 | £200 | £100 | 25 years | £166,946.61 |
Frequently Asked Questions on Offset Mortgages
These are generic answers and can vary from lender to lender so you should speak to your professional Mortgage Adviser.
To understand the full technicalities, I would recommend you speak to a professional Mortgage Broker.
