When you take on any mortgage type, you will be paying capital (the balance) and the interest (at a percentage of the remaining balance) at the same time. If you are looking to lower the amount of interest you pay per month, you may find it beneficial to take out an offset mortgage in Cardiff.
When an applicant looks to get an offset mortgage in Cardiff, their mortgage lender will open them up a savings account, to run alongside their mortgage term length. You won’t be paying back the capital balance of your mortgage from this savings account, instead, you’ll lower your interest.,
To use an example of this, you had a £100,000 mortgage to pay off and you chose to put £20,000 into your savings account, there will still be a £100,000 mortgage for you to pay per month, but you would only be paying interest on £80,000, with the remaining amount free from interest.
The amount of interest that you will usually pay is calculated at a percentage of your mortgage balance, which increases how much you pay overall. With this in mind, the more interest you offset into your savings account, the less you’ll have to pay overall, which can save you money.
As we said, the money that you will put into the savings account is to be offset against your interest, lowering your overall mortgage payments. Unlike you would for a standard savings account, you do not pay tax on this savings account. This is definitely more beneficial for higher rate taxpayers.
One of the possible downsides to this type of mortgage, is that your savings also won’t grow like a standard savings account. No interest will be earned on an offset mortgage savings account.
Even with this, a potential offset mortgage applicant may still not be deterred, especially as you could be saving so much by offsetting the interest. Another good side to it, is that there is a lot of flexibility in the account.
Looking back at the previous example of a £100,000 mortgage and savings of £20,000, if you then needed to use some of your savings, in perhaps an emergency situation, you can do this. It’s important to remember though, you would once again be paying interest on a higher amount.
So whilst perhaps you are only paying interest on £80,000 at that time, if you were to draw out £10,000, you would then be paying interest on £90,000 again until you had enough funds to deposit back into your offset mortgage savings account.
You will always remain responsible for your monthly mortgage payments, but you would be paying much less on your interest overall.
If you ever got to a point where you could offset the whole balance nearer to the end of your term, maybe through some handy work bonuses or inheritance, you would still be responsible for your capital repayments, you would just have much less interest.
What this means, is that whilst offsetting your entire mortgage balance would effectively reduce your interest rate to nothing, the capital will still be there (your mortgage will be made up of both capital and interest) and need to be paid back.
Depending on who your mortgage lender is, you may be able to make overpayments to your mortgage by a specific additional amount per year. As a general rule, it’s up to 10% per year, though it is always worth asking your mortgage lender first.
Overpaying too high per year can possibly lead you to being required to pay an early repayment charge.
Whilst you may have limitations on how much you can overpay your mortgage balance, you have the freedom to put as much as you want into your savings, whenever you would like to do this.
There are lots of factors to think about when taking out an offset mortgage in Cardiff, as to whether or not it is the most suitable option for you. This can be a difficult choice to make, especially if you are a first time buyer in Cardiff.
Really it’s all about the pros and cons. As we said, higher rate taxpayers will definitely benefit from it, as their savings are tax-free. You are also able to utilise the flexibility to withdraw and deposit funds as you wish to do so.
Another positive, especially if you are applying for a first time buyer mortgage in Cardiff, is that someone else may have the option to offset against your mortgage, meaning a family member or friend could help bring your payments down, though this depends on mortgage lender.
At the end of the day, you at least need to be making significantly large payments into this savings account to see the benefits and to outweigh the costs that are involved with offset mortgages.
Book in for a free mortgage appointment today and we’ll look to see if an offset mortgage, or an alternative mortgage type, is right for you.
Date Last Edited: December 6, 2023