Santander offset mortgage (Review)
In this blog, we are going to discuss the Santander offset mortgage.
What you must first know is that the Santander offset mortgage does not exist as of the time of writing but there are many mortgage lenders who offer offset mortgages.
We have written this guide as if the Santander offset mortgage exists and listed out some of the key features a Santander offset mortgage may have and answered some key questions you may have about offset mortgages in general.
What is an Offset mortgage?
An offset mortgage is a mortgage which is linked to a savings account. You put money into a savings account which is linked to your mortgage and this amount is used to offset the balance outstanding on your mortgage. This means when interest is charged on your mortgage it is charged on a smaller outstanding balance and hence you make lower monthly mortgage repayments.
Some offset mortgages offer interest on the linked savings account but most don’t.
Some offset mortgages will allow you to withdraw from the link savings account and also allow you to add extra contributions. This means that the interest being charged and your monthly mortgage repayment on the offset mortgage may differ from one month to the other.
If you plan to withdraw or contribute funds into your linked savings account then it may be very important to know how the interest is charged on your offset mortgage and when.
A Santander offset mortgage will have the same scope as mentioned above but Santander may offer interest on its linked savings account or maybe they won’t.
Example of an offset mortgage:
You have a mortgage of £600,000 and savings of £100,000 which has been put in a linked savings account.
Your mortgage lender will only charge you interest on £500,000 rather than the total mortgage balance of £600,000.
Can you still get offset mortgages?
Yes, you can still get offset mortgages. Offset mortgages are available on the mortgage market but unfortunately at the time of writing a Santander offset mortgage does not exist. An offset mortgage is very beneficial to those who have a huge amount of savings. First-time buyers who may be struggling to get on the property ladder but are unable to save a mortgage deposit may be able to use gifted savings from their family members or friends as a means to get on the property ladder.
An offset mortgage will help reduce the cost of a mortgage by reducing how much interest is paid and how quickly a mortgage can be repaid. Because the interest paid on savings accounts is usually greater than the interest charged on mortgages, you will usually have a smaller opportunity cost by using your savings for an offset mortgage.
How does the Santander offset mortgage work?
The Santander offset mortgage will have provided a linked savings account which will let you reduce the balance on which you pay interest on. The savings in your offset mortgage do not actually pay off your offset mortgage but reduce the amount on which interest is charged and essentially making your monthly mortgage repayments smaller based on how much you have on your savings.
Is a Santander offset mortgage a good idea?
If the Santander offset mortgage existed then this may be seen as a good idea because offset mortgages will allow you to reduce the interest being charged on your mortgage and as most offset mortgages do not pay interest on the linked savings account this means that you will not be eating into your personal savings allowance and may be able to find a savings account which pays a better interest rate to store any other savings you may have.
What is the difference between offset and repayment mortgage?
An offset mortgage allows you to reduce the balance outstanding on your mortgage by offsetting it with savings which you have deposited in a linked savings account. This does not mean you have repaid your mortgage but rather the balance on which interest is charged is smaller. A repayment mortgage on the other hand is a typical mortgage where you make monthly mortgage repayments on the full balance you owe. As you continue to make your monthly mortgage repayments the balance owed slowly falls.
Can you withdraw money from an offset account?
Yes, some mortgage lenders will allow you to withdraw and contribute money to the savings account linked to your offset mortgage. If Santander offered the Santander offset mortgage then you will want to check if they allow you to withdraw money from the linked savings account or not.
Do you pay tax on an offset mortgage?
No, you don’t pay tax on an offset mortgage as most offset mortgages don’t offer interest on the savings account and hence there is no interest earned to be taxed.
Pros of offset mortgages
The reduced interest charges mean you can either pay the same amount each month and clear your mortgage quicker or pay less each month.
You may be able to access your savings if you have a financial emergency.
They can be very tax-efficient if you are a higher rate taxpayer but you should seek tax advice about this.
You may be able to make mortgage overpayments on your offset mortgage. (you may be charged an early repayment charge so ask your lender if any restrictions apply on making overpayments.
Cons of offset mortgages
The interest rates can be much higher than other mortgage products
Most offset mortgages will not pay interest in the linked savings account
Offset mortgages aren’t very common in the mortgage market and hence the rates offered arent very competitive.
Using your savings for a bigger mortgage deposit may be a better idea.
In this blog, we discussed the Santander offset mortgage. If you have any more questions in regards to this then please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.