With any mortgage that you take out, you will be paying a combination of capital (the balance) and the interest (at a percentage of the remaining balance). You may actually be able to reduce the amount of interest you pay per month, by taking out an offset mortgage in Sunderland.
When a mortgage applicant takes out an offset mortgage in Sunderland, their mortgage lender will open a savings account for them, in their name, to run alongside their mortgage term. This savings account will not pay back your mortgage balance, but instead will lower the amount of interest that you pay.
So if we were to say, for example, that you had a £100,000 mortgage to pay off and put £20,000 into your savings account, you’d still have that £100,000 mortgage to pay per month, but you only pay interest on £80,000.
The amount of interest that you will have to pay is generally calculated at a percentage of your mortgage balance, which is what increases the overall cost. In short, the more interest you offset into your savings account, the less that you have to pay back on interest overall.
This of course, can save you a lot of money.
As mentioned above, the money that you deposit into your savings account will offset against the interest, reducing the amount that you pay overall. Unlike a standard savings account, you will not be paying tax on your savings, which can be beneficial for higher rate taxpayers.
A possible downside to this type of mortgage, is that your savings will not see any growth either. Interest will not be earned on any of the savings that are linked to your offset mortgage in Sunderland.
Even with this in mind, a potential offset mortgage applicant may not be deterred, especially with the potential for savings by offsetting the interest against the mortgage balance. Additionally, the flexibility of the account is another positive.
Using the aforementioned example of a £100,000 mortgage and £20,000 in savings, if you for any reason needed to dip into your savings, you have the freedom to do so. It’s important to remember though, that you would be paying interest on a higher balance amount.
So whilst with the savings in you would be paying interest on £80,000, if you drew out £10,000 to use, you would be paying interest on £90,000 again until you deposited further funds back into your savings account.
You will still have the responsibility of maintaining your monthly mortgage repayments, you would just have less interest to pay per month.
If you managed to offset our entire balance towards the end of your term (maybe through a combination of work bonuses and an inheritance helping you to achieve this), you would still be responsible for the repayment side of things, until the end of your mortgage term.
As mentioned earlier on, your monthly mortgage payments will be a combination of interest and capital. Whilst offsetting your whole mortgage balance would effectively reduce your interest rate to nought, the capital will still remain and require payment.
Depending on your mortgage lender, you may be able to repay your mortgage by a specific additional amount each calendar year. As a general rule of thumb, you can repay up to 10% per year, though you should always ask your mortgage lender prior to doing this.
Overpaying by too much per year can result in you owing an early repayment charge to the mortgage lender.
Whilst there may be a limit on the amount you are able to overpay on the mortgage balance, you are free to deposit as much funds as you would like to into your savings, whenever you see fit.
There is a lot to consider when dealing with an offset mortgage, as to whether or not it is the most suitable mortgage option for you. This can be quite a difficult decision, especially if you are applying for a first time buyer mortgage in Sunderland.
Really, it’s all about weighing up the positives and negatives. As said previously, this will be beneficial to higher rate taxpayers because they can deposit savings tax-free. Again, they are also very flexible, allowing you to deposit and withdraw funds at any time.
Another positive, especially for a first time buyer in Sunderland, is that someone else may have the option of offsetting against your mortgage. This means a family member could help you lower your interest rates, though this varies from lender to lender.
On the other hand, offset mortgages in Sunderland usually have higher interest rates than other mortgage deals that could be available to you. You are more or less paying a premium for a flexible mortgage type with the ability to offset against the interest.
Additionally, as touched upon above, you won’t be earning any interest on those savings as you would with a regular savings account. Furthermore, whilst you could offset against the interest if you come into more money, you could also just overpay your mortgage to reduce the balance.
There are many different reasons as to why it could be a good or bad idea for a home buyer. At the very least, you need to pay in a good amount into your savings account for it to be worthwhile, especially when it could cost a good amount to set up in the first place.
Book your free mortgage appointment and talk to a trusted mortgage broker in Sunderland today, where you will benefit from expert mortgage advice in Sunderland on the topic of offset mortgages and how they could work alongside your mortgage journey.