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For property investors looking to make a saving, an offset mortgage may be a good option. How do these mortgages work, and what are the benefits for you?

What is an offset mortgage?

An offset mortgage is linked to a savings account with the same lender and is used to reduce the interest you pay on your mortgage. Instead of using this cash to reduce your overall loan, it lowers the interest charged on your monthly repayments.

How does an offset mortgage work?

The money in the savings account is used to ‘offset’ the amount you’re repaying on your mortgage. For example, you have a mortgage of £400,000 and £40,000 in a savings account.

If you used an offset mortgage with this savings account, you would only pay interest on £360,000 of your loan.

In this instance, you could save up to 10% on the interest you would pay on your total mortgage.

How much could I save with an offset mortgage?

It’s essential to cost up your options before deciding whether an offset mortgage is for you. The MoneySavingExpert has an easy-to-use calculator linked here.

What are the benefits of an offset mortgage?

The primary benefit of an offset mortgage is that you will pay less interest and reduce your monthly repayments.

Depending on the deal, you may save more money in reduced interest costs than you would earn with the money in a typical savings account. There’s also the added benefit that you pay no tax on the interest you save.

Furthermore, you can still deposit and withdraw money from your savings account. Of course, adding or removing funds from the account will impact whether you save more or less on your mortgage.

What are the drawbacks of an offset mortgage?

On the other hand, there are some drawbacks to an offset mortgage that might mean it’s not the best option for you.

For one, your savings won’t accrue any interest if used for an offset mortgage. Similarly, you may decide you want to use your savings towards a larger deposit instead and reduce your monthly repayments this way.

Consequently, as these mortgages are more complex than standard buy to let, the interest rates for offset mortgages are typically more expensive. In some cases, a larger deposit may mean you pay less on your monthly repayments than you would with the interest savings on the offset mortgage regardless. It’s best to have an experienced broker determine the most suitable option for you.

How many lenders offer offset mortgages?

While this type of mortgage product is more popular in the residential space, only a few buy to let lenders currently offer this mortgage option.

The lenders offering offset mortgages are typically more specialist, so it’s worth reviewing your options with a broker.

What next?

To explore whether an offset mortgage is beneficial for your property investment plans, please get in touch. Our team of expert mortgage brokers will be able to cost up and compare the options available to you to support you on your next steps.

Call us on 0345 345 6788, or submit an enquiry here.

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