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Could an offset mortgage be right for you?

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Summary

Could an offset mortgage be right for you?

3 min read

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Your savings could be helping you reduce your mortgage costs.
 

Most of us will borrow money against a property at some stage of our lives. Typically, this is to buy a property, but there are other reasons to take out a mortgage, such as undertaking home improvements or funding a personal business.

Whatever the reason you take out a mortgage, getting the best deal on interest is a crucial part of mortgage planning. A mortgage is a longer-term debt – usually at least 10 years and sometimes up to 30 years. Over these time scales, even small savings in mortgage interest can make a big difference to how much you pay.
 

Make your deposits work for you

One way to reduce the cost of lending is through an ‘offset mortgage’. An offset mortgage allows you to deduct – or offset – your deposits against your mortgage balance for the purpose of calculating interest. As a result, you only pay interest on the difference between your mortgage balance and your offset deposit balance.

For example, let’s consider two people in very similar situations. Each has a £750,000 interest-only mortgage and cash on deposit that averages at around £200,000 at the end of each day.

Where these people differ, is in their mortgage arrangements. One has a conventional mortgage, while the other has taken out an offset mortgage that takes their deposit account balance into consideration when calculating their overall net lending position.

The borrower with the offset mortgage pays approximately £500 less in mortgage interest per month.

  Borrower 1 Borrower 2
Mortgage balance £750,000 £750,000
Amount on deposit £200,000 £0
Offset deposit balance £0 £200,000
Monthly deposit interest* £83 £0
Monthly mortgage interest payment** £1,869 £1,370

*Assumes 0.50% interest per annum on non-offset deposits; no credit interest is payable on deposits held in the Offset deposit account
**Assumes a mortgage interest rate of 2.99% per annum

While the second borrower may forego the £83 monthly interest on their deposit, they’ll pay approximately £500 less in interest every month. As this is an interest-only mortgage, both borrowers will still need to repay the mortgage balance at the end of the term.

Calculating the saving over the lifetime of a mortgage is not quite so simple, because interest rates will change. In this example, if the interest rate remained the same over the entire mortgage term, this would be approximately £6,000 a year, which would amount to about £150,000 over the life of a 25-year mortgage (the £499 difference between the monthly interest payments between Borrower 1 and 2 mentioned in the above table over the course of 12 months).

“With inflation currently far higher than even the best deposit rates available, money held in ordinary deposit accounts is rapidly losing its spending power.”

Is your money working hard enough?

Many Adam clients have ‘lumpy’ incomes that can see them holding large, shorter-term deposit balances, for example where bonuses represent a large proportion of their income. Holding large amounts of cash on deposit in the long term could result in losing money in real terms. With inflation currently higher than most deposit rates available, money held in ordinary deposit accounts is losing its spending power over time.

In the longer term, you may be better off finding another home for this cash. Notice accounts or term deposit accounts typically offer a higher interest rate than ordinary accounts, while normally foregoing instant access to your deposits. You might also consider investing – this doesn’t have to be complicated. Remember, though, that the value of investments can go down as well as up and you could get back less than you invested. And investments should be held for the medium to long term (five years or more).

Offset mortgages represent another way to benefit from your cash reserves, particularly if you need to retain access to your cash and don’t wish to commit it for the long term. The Adam Offset Select mortgage allows you to offset your deposits held in GBP, EUR and USD against your mortgage, as well as to use deposits held by an Adam-banked relative or connection to reduce the cost of your mortgage.

Full details of our range of mortgages can be found here. If you would like to find out more about offset mortgages from Adam, discuss your requirements with one of our expert mortgage advisers, or have any questions, please contact your private banker or Adam 24 on 0131 278 3777. You can also consult our Mortgage Calculator Tool.

This product may not be suitable to you if:

- you require access to your Offset deposits while paying your mortgage that could significantly impact the benefits of the product. Please note that instant access to your Offset deposits may not apply, should you fail to repay your mortgage.

- you do not have any deposits to offset for the duration of the borrowing.

There are a number of risks that should be understood before committing offset deposits in foreign currencies:

- The value of your foreign currency Offset deposits could reduce against your GBP mortgage balance should foreign exchange rates work against you; hence it is important that you understand the risks related in using foreign currency deposits against your Offset Select mortgage.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

Over 18s only. Terms and conditions apply. You may not be eligible for all Adam mortgage solutions.

KEY TAKEAWAYS

An offset mortgage allows you to use your cash deposits to offset your loan, reducing the mortgage balance you are charged interest on. Depending on your profile, this could help you get the most from your money.

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