How does the first direct offset mortgage work?

How does the first direct offset mortgage work? If you’re considering ways to cut interest and pay off your mortgage sooner, an offset mortgage could be worth exploring.

For example, First Direct offers a popular offset mortgage that allows you to link your savings to your mortgage balance. This can reduce the amount of interest you pay and give you more control over your repayments.

In this article, we’ll explain how the works, its key features, and whether it could be the right choice for you.

What is an offset mortgage?

An offset mortgage is an interest-only loan that links your savings account to your mortgage. As such, lenders will treat any savings that you have as overpayments on your mortgage.

However, you can still access the savings you have offset. However, this will affect how much interest you pay.

In addition, your savings and mortgage will need to be with the same provider. Similarly, some lenders will offset any money you have in your current account. However, this is less common.

In addition, an offset mortgage will be either on a fixed or variable rate. An offset mortgage is sometimes referred to as a flexible mortgage or a flexible offset mortgage. Similarly, the First Direct Offset Mortgage works the same as above.

How does an offset mortgage work?

With an offset mortgage, you pay interest on your mortgage balance. However, the mortgage balance will be calculated by taking the outstanding balance minus any savings you have in the linked account(s).

As an example, you have a mortgage of £250,000. You also have linked savings of £70,000. Therefore, you would pay interest on £180,000. You can use an offset mortgage calculator to see how much you might save.

Consequently, as you add to or withdraw some of your savings, the amount of interest you pay will vary.

With the above example, consequently, if you withdraw £10,000 from your savings, you would then pay interest on £190,000.

Why get an offset mortgage?

The first direct offset mortgage or any offset mortgage can save you money over time. In addition to potentially paying less interest, you may also shorten the term or reduce the payment you make each month.

Term Reduction

If you keep your payments the same, you are, in effect, overpaying each month. For example, if you offset £50,000 but continue with the same payments as before, you will reduce the term of your mortgage and be mortgage-free sooner.

Payment Reduction

Therefore, by offsetting your savings, you will pay less interest each month. Therefore, you will have more money to spend. However, if you offset that money, you will lower the payments even more.

Although the mortgage term will stay the same, you will pay less interest on your mortgage overall.

Does the first direct offset mortgage save you money?

An offset mortgage can save you money, but it is dependent on certain factors, such as:

• How much of your savings you offset
• How long you offset your savings and whether you leave them untouched

 

You will need to offset a lot of savings over a lengthy period to make the most of an offset mortgage. However, you will save even more if you can add to your savings regularly.

Can you have a family offset mortgage?

Similarly, some lenders offer family offset mortgages. This allows family members to deposit money into your offset-linked savings account. As such, this can make it easier for a child to obtain a mortgage in the future.

Advantages and Disadvantages

There are advantages and disadvantages to an offset mortgage, some of which are below.

Advantages

You can still access your offset savings.

Even offsetting a small amount of savings can make a difference to your mortgage.

You can add to your savings on a regular basis, therefore reducing the interest you pay.

It can be tax efficient.

Depending on interest rates, you may save more money by offsetting than you would from a regular savings account.

Disadvantages

There are many advantages of an offset mortage, however, one of the main disadvantages are that you earn no interest on your savings while offsetting.

Higher returns may be available from other investment options.

Interest rates on offset mortgages tend to be higher than those on standard mortgages.

Not all lenders offer this type of mortgage.

Some have a lower maximum loan-to-value. As such, you may need a larger deposit.

The First Direct Offset Mortgage

Having covered the basics above, we can now look at the specific features of the First Direct Offset Mortgage.

How does it work?

The First Direct Offset Mortgage is designed to give you the best of both worlds.

Furthermore, it allows you to link your 1st account and any savings, using any credit balances to reduce the amount of interest you pay on your mortgage. Experts call this process "offsetting."

As described above, First Direct calculates interest by subtracting your savings from your mortgage balance. As such, the more savings you have, the less interest you will pay. However, you will still have access to your savings when and if needed.

Which accounts can I offset?

Moreover, you can link your 1st account or any eligible savings account to your offset mortgages.

However, you do not have to link all your accounts, but any accounts you do not link will not benefit from offsetting.

Also, if your mortgage is in your name only, you can link joint accounts that you are named on with one other person.

In addition, if the mortgage is in joint names, you can link both joint and sole accounts.

Therefore, the First Direct Offset Mortgage offers great flexibility on what accounts you can use to offset.

Can I link more than one account?

You can link as many eligible accounts as you want to obtain maximum benefit from any credit balances. However, if you have more than one First Direct Offset mortgage, they may be on different interest rates. As such, you will have to decide which accounts are linked to which mortgage.

Can I change my linked accounts?

You can change your linked accounts at any time. You need to contact First Direct to make the arrangements.

Can I offset more than one mortgage account?

This is possible with the First Direct Offset Mortgage, depending on certain factors. If the interest rate applied is the same for both mortgages, they can be linked together with any savings accounts you have. However, if the interest rates are different, then you must decide which accounts are linked to which mortgage.

Who can link or unlink an account?

Only someone named on the mortgage can make this change.

What happens to the interest on my linked accounts?

Because you are offsetting, you won’t earn interest on any credit balances. This applies even if your savings exceed the outstanding mortgage amount.

If you link your 1st account and go overdrawn, debit interest will be calculated at the same rate as your offset mortgage. Furthermore, this includes the first £250, which is normally interest-free if not linked to a mortgage.

If you unlink an account, First Direct will restore its original rates and terms.

Making changes to your existing First Direct Offset Mortgage

First Direct Offset mortgages are no longer available to new customers. However, if you already have one, you can make changes. These changes may include changing the interest rate or changing the term of the mortgage.

Essential information

An offset mortgage is interest-only, so you will need to provide the lender with regular updates on how you intend to pay the capital back. For example, you may use your savings or investments, use an endowment policy, or the proceeds from the sale of another property.

Therefore, you must review your repayment plan on a regular basis. This will allow you to make any necessary adjustments to ensure you are on track to pay the mortgage off in full at the end of the term.

A financial advisor will be able to help you with any savings or investments so that you can repay the mortgage in full.

Get expert advice

The First Direct Offset Mortgage offers many benefits. However, before making any decisions, there are some disadvantages that need to be considered as well. Some key points are:

You can use your linked account balances and savings to reduce interest payments.

You can make unlimited overpayments at any time. However, paying the mortgage off early may incur early repayment charges.

If you repay any of your mortgage balance, you can redraw it at any time. However, you will still need to repay the mortgage in full at the end of the term.

Redrawing will increase your interest payments. Also, it may increase the time it takes to pay off the mortgage.

Any tax benefits will depend on your personal circumstances, and tax rules may change in the future.

First Direct secures any borrowing against your property when linked to an offset mortgage.

If you have any doubts whether an offset mortgage is right for you, consult a mortgage advisor who will help you through the decision-making process. Also, if you do choose the offset mortgage, a financial advisor can help you keep on track to repay your mortgage in full at the end of the term.

Let Regulated Advice match you with a mortgage advisor for expert advice.