Should we get an offset mortgage?
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My partner and I have saved for a deposit and found a house that we want to buy. It’s fine to live in but we want to do some major improvements in a few years when we’ve saved more. A friend suggested we don’t put all our savings down for the deposit but have an “offset mortgage” so that we can use the extra cash when we come to do the work. Is this a good idea?
Diane Fish of Smith & Pinching responds:
With an offset mortgage, your loan is linked to a savings account and you are charged interest on the amount that is the sum borrowed minus the cash you have in the savings account. So if you borrowed £200,000 and had £20,000 in the savings account, you would pay interest on £180,000.
This might sound like a good idea, given that you are hoping to spend money on the property at some stage in the future, but it does have some drawbacks. With an offset mortgage, you may find that the rates on offer are not as competitive as a standard repayment mortgage, which may cancel out some of the benefits. You will still be making repayments for the full loan amount: only the interest will be reduced. In addition, you are unlikely to be paid interest on the money you hold in the offset account and, when you use cash from the account, the interest you pay on your loan will increase accordingly.
It’s important to remember that if you choose an offset mortgage arrangement, your loan will be for a higher amount than if you had used all your savings for a deposit, so your repayments will reflect that.
Depending on timescales for your planned home improvements, it may be more efficient to re-mortgage at that point for a higher amount to access additional funding – if your circumstances allow you to afford the new repayment levels.
Offset mortgages can be used for a variety of reasons and can be very beneficial over the longer term. I think it would be worth discussing your plans with an independent mortgage adviser so that you can evaluate all the options. This is a big decision, so please do get advice before going ahead with a mortgage.
Your home may be repossessed if you do not keep up payments on your mortgage. There will be a fee for the mortgage advice. The precise amount will depend upon your circumstances, and the type of lending taken. Smith & Pinching’s minimum mortgage advice fee is £700. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk
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