De-mystifying offset mortgages – part 2

October 2021

In the second article in his two-part series, Jonathan Stinton, Head of Intermediary Relationships at Coventry for intermediaries, busts more myths about offset mortgages having already discussed misconceptions about complexity, who can benefit, and what levels of savings a borrower needs.

Offset mortgages are misunderstood by many, as lots of borrowers are unaware of the benefits this type of product can bring them. Some intermediaries may be reluctant to recommend offset deals, and this combined with lack of consumer knowledge means many are potentially missing out on savings and financial flexibility.


Myth: An offset mortgage is more expensive than a 'standard' mortgage


Many borrowers and brokers believe that offset mortgages may be more expensive than an equivalent standard repayment product.


Fact: Offset mortgages mean that borrowers can save money over the course of their deal


It's true that interest rates on offset products can be higher than on an equivalent standard repayment deal, but thanks to the savings placed aside, these are charged on a smaller loan amount. That means that borrowers pay less mortgage interest while the savings are offset.


This gives the borrower a choice over the form of saving they make: they can either reduce the term of their mortgage, as the smaller amount of overall interest means they pay the overall loan off sooner and save money in the long term; or they can reduce their monthly repayments, saving money in the short term.


Depending on the lender they use and the interest rate they can get, an offset mortgage could deliver significant savings.


Myth: Savings are better off elsewhere


Funds used for an offset mortgage don't earn savings interest, so instant access cash savings would be better allocated in a different type of account, like a cash ISA.


Fact: Using savings for an offset mortgage is great value when interest rates are low


With interest rates still at historical lows following the following the Bank of England's recent decision to maintain base rate at 0.10%, many people are looking for the best way to get a good return on their savings. That's where offset can come in.


While it's true that money in an offset savings account doesn't earn savings interest, it can work harder than a repayment mortgage and a standard easy access savings account. That's because the offset benefit is calculated using the mortgage interest rate,  which currently tends to be higher than that of a typical cash savings rate. Another plus point is that there's no tax to pay on the benefit received from an offset mortgage. 


However, it's worth noting that if borrowers reach the point where their offset savings amount is greater than their mortgage balance, they will no longer receive any benefit or interest on the excess amount. This is when you and they may want to review their situation, as they might want to move the excess amount from the offset savings account into an account that pays interest on savings.   


Myth: Offset mortgages aren't right for borrowers with complex incomes, like the self-employed


Complex borrowers need simple, straightforward mortgage products to account for their ever-changeable circumstances or specialist needs.


Fact: Offset can be great for complex cases and self-employed clients


Offset deals are both available and beneficial to all sorts of borrowers, and that includes those with either a complex case or the self-employed. The same considerations for income security apply as with any other deal, and that means that a complex borrower is just as likely to get approved for an offset mortgage as they are for any other product.


Part 2:

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