Offset mortgages are one of the most misunderstood products on the market, with many consumers unaware of the benefits on offer. Intermediaries can sometimes be reluctant to recommend these products to their clients, meaning that both brokers and borrowers could be missing out on potential opportunities.
When used in the right situations, an offset mortgage can help to lower monthly repayments or lead to earlier repayment of the mortgage loan – providing significant potential benefits for borrowers. Some lenders also allow borrowers to choose which of these benefits they want to prioritise.
In the first article of a two-part series, Jonathan Stinton, Head of Intermediary Relationships at Coventry for intermediaries, will bust some of the most prevalent myths around offset products and lift the lid on one of the most rewarding products on the market.
Myth: Offset mortgages are complicated
Offset mortgages have a reputation for being complicated, and many brokers and borrowers tend to prefer simpler products.
Fact: Offset mortgages are simple
However, the truth is that offset mortgages are quite simple for both borrowers and intermediaries.
At its core, an offset mortgage is a way for a homeowner to make their savings work harder and potentially reduce the cost of their monthly repayments. The mortgage is linked to at least one savings account, depending on the lender, which means that the money in a client’s account can be offset against the loan to reduce the mortgage interest charged.
The borrower pays no mortgage interest on the amount in the savings account. Lenders calculate mortgage interest on the difference between the loan amount and the savings balance which leaves a smaller sum on which the borrower pays interest. The savings in this account ‘offset’ the interest a client is charged, so the benefit of an offset mortgage is the smaller amount of mortgage interest which must be paid.
The client can then choose how they use the saving they make, either to reduce the term of their mortgage or to reduce their monthly payments. So not only is it simple, but it can also help to make a real difference to borrowers’ financial futures.
Furthermore, with an offset mortgage, the customer’s savings are still accessible and can be dipped into at any time, if an emergency ever arose.
Myth: Offset products are only beneficial for rich clients
Many believe that you have to either be a big earner, or a big saver, to be able to get an offset mortgage.
Fact: Offset products can benefit a large number of borrowers
While it’s true that offset mortgages are attractive for high earning clients and can be particularly helpful when saving for a tax bill or for putting a bonus away for now, they can also be fantastic for borrowers with a smaller income.
Saving even £50-£100 per month on repayments can have a big impact on a client’s finances and can even help them to pay off their mortgage early. For these clients, a good option could be a lender that offers an easy access offset savings account, so they can easily dip into their savings if they need to.
Offset can also be great for self-employed clients as the money they’re saving – for a tax bill, for example – could be working to help offset the mortgage interest they’re charged when they don’t need it, and can be easily accessed as soon as they do.
Offset mortgages can be a fantastic option for a range of clients – they’re simple to manage, they make savings work harder and borrowers could use their savings to reduce their monthly mortgage payments or reduce their term. And who wouldn’t love to do that?!
Myth: Borrowers should only take out an offset mortgage if they have big savings
Many don’t even consider an offset mortgage, even if they understand the benefits, because they believe that they need to have a significant amount saved up.
Fact: Even the smallest nest-egg can be used for an offset mortgage
The truth is that borrowers can actually take out an offset deal with no minimum savings required, and they only need one linked savings account.
However, the higher savings balance a borrower has, the more benefit they will experience by being on an offset deal. That’s why making a small, regular savings deposit can make a big difference for getting started.
Using the savings as part of an offset mortgage is even more attractive in this low rate savings environment, and as another added benefit, there is no tax on the savings, protecting the money for the future if it needs to be withdrawn.
Jonathan Stinton is head of intermediary relationships at the Coventry Building Society