Interest rates in the UK have been at historic lows since the 2008 US mortgage crisis. The onset of the coronavirus pandemic has made a difficult situation even worse. At the moment there are even suggestions that UK base rates will dip into negative territory. Therefore, should we expect to see more demand for flexible offset mortgages?
What is an offset mortgage?
There are two sides to an offset mortgage. On one hand you are still contractually obliged to make minimum regular repayments to your mortgage. On the other hand, savings accounts with your bank can be linked to your mortgage balance therefore reducing interest charges. As UK base rates are likely to remain at record lows for some time to come, it may be worth considering what many see as a flexible offset mortgage.
How would a linked savings account benefit me?
The idea is fairly simple. Let us assume in this scenario you have a £300,000 mortgage and £50,000 in savings. A flexible offset mortgage would link your savings account to your mortgage account. Therefore, rather than paying mortgage interest on £300,000, this would be offset against your savings account, meaning you only pay interest on £250,000. At the moment savings rates in the UK are minimal while mortgage rates tend to average out at in excess of 4%. So, if you were to maintain £50,000 in your linked savings account for 12 months, you would save £2000 in mortgage interest payments.
While your mortgage and savings accounts are linked, you would not receive interest on your savings. However, with interest rates so low and mortgage rates much higher, this is a significant benefit at the moment.
Can I still access my savings?
You tend to find that companies offering offset mortgages will stipulate a minimum level of savings in the linked account. Let’s say in this example the minimum level was set at £25,000. You could either maintain the £50,000 balance or you may need up to £25,000 in the future. This access to additional capital can be a godsend for many people. The only downside, if the balance was to fall to £25,000 then you would pay interest on a £275,000 mortgage balance as opposed to £250,000.
There may also be opportunities to increase your savings and further reduce your mortgage interest payments. For many people it is the flexibility that offset mortgages offer which is the main attraction – although at the moment the interest rate situation is hugely beneficial.
Do I still make regular monthly repayments?
As we touched on above, it is sensible to see an offset mortgage as two different elements. We have the linked savings accounts, reducing mortgage interest going forward. Then there is the contractual monthly mortgage repayments you will need to fulfil. Even though in theory you will have access to your savings as and when required, you will still need to make regular mortgage payments.
The beauty of offset mortgages, especially in the current interest rate climate, is the ability to use savings to reduce mortgage interest payments. Current savings rates in the UK are minimal while mortgage rates tend to be around 4%. This is an alternative means of making your money work harder to your benefit. Certainly worth considering!