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Flexible Mortgage

How offset works

The way our mortgage offset facility works is simple. A savings account (called an Offset Saver Account) is set up alongside your mortgage.

The money in your savings account is then ‘offset’ against your mortgage. So, while you won’t earn any interest on the savings in your Offset Saver Account, in effect you won’t be charged any interest on the same amount of your mortgage — as shown by the diagram below. 

Offset diagram

This could potentially save you thousands of pounds in interest and you can benefit from this in one of two ways:

  • Paying off your mortgage early ( Reduced Term), or;
  • Reducing your monthly mortgage payment (Reduced Monthly Payment)

Option 1 – Reduced Term

With Reduced Term, while your monthly mortgage repayments stay the same each month (subject to changes in mortgage rates), the amount of mortgage interest you need to pay is lower due to your offset savings. More of your monthly mortgage payment is therefore used to repay the balance of your loan which effectively means you’re making mortgage overpayments each month. This could allow you to pay off your mortgage sooner and save thousands of pounds in interest.

How much sooner you pay off your mortgage is up to you. The more money you have in your Offset Saver Account the less interest you’ll be charged on your mortgage.

This example illustrates how you could benefit from the Reduced Term option.

Example based on a:

  • £201,024 mortgage over 25 years on a repayment basis (this includes a product fee of £999 and a CHAPS fee of £25)
  • 2 year fixed rate of 3.49% reverting to a Standard Variable Rate of 3.99% after two years. The overall cost for comparison is 4.0% APR.
  • £25,000 lump sum in the Offset Saver Account from completion (this example is based on a completion date of 15 January 2014).
  • £100 regular monthly payment to the Offset Saver Account.
  • These are example interest rates and not necessarily the current rates offered by Scottish Widows Bank.

By offsetting, the term of the mortgage would be reduced by 3 years and 5 months, and £46,440 is saved in interest payments. The reduction of the mortgage term is illustrated in the diagram. In addition, there would be enough savings in the Offset Saver Account to repay the mortgage balance 7 years and 1 month early.

offset reduction graph

For more detailed information about offset, which we recommend you read, please see our Offset FAQs.

Option 2 – Reduced Monthly Payment

With this option, the term of your mortgage remains unchanged, but your monthly mortgage payment is reduced. This is because the offset benefit you earn each month from the savings in your Offset Saver Account is in effect used to reduce how much mortgage interest you pay the following month.

This means your savings could give you more disposable income each month. And, in addition to reducing your monthly payment, you could also save thousands of pounds during the term of your mortgage.

We collect your mortgage one month in arrears, so it's important to remember the savings balance in one month will reduce the mortgage payment you make two months later.  For example, the offset benefit accrued in April would reduce your mortgage payment for May, which would be collected on 1 June.

This example illustrates how the Reduced Monthly Payment offset option works:

Example based on a:

  • £201,024 mortgage over 25 years on a repayment basis (this includes a product fee of £999 and a CHAPS fee of £25).
  • 2 year fixed rate of 3.49% reverting to a Standard Variable Rate of 3.99% after two years. The overall cost for comparison is 4.0% APR.
  • Completion date of 15 January 2014
  • £25,000 lump sum in the Offset Saver Account from completion.
  • These are example interest rates and not necessarily the current rates offered by Scottish Widows Bank.

The column “Mortgage payment after offset benefit applied” shows how the Reduced Monthly Payment option reduces the monthly mortgage payment. In total, £23,673 would be saved in interest payments during the mortgage term, and there would also be a sufficient Offset Saver Account balance to repay the mortgage balance 24 months early.

Month Number of days Mortgage payment date Offset benefit earned Offset benefit applied Mortgage payment before offset benefit applied* Mortgage payment after offset benefit applied**
15 Jan to 28 Feb 45 1/3/13 £107.57 £0.00 £1332.06 £1332.06
March 31 1/4/13 £74.10 £107.57 £1005.30 £897.73
April 30 1/5/13 £71.71 £74.10 £1005.30 £931.20
May 31 1/6/13 £74.10 £71.71 £1005.30 £933.59
June 30 1/7/13 £71.71 £74.10 £1005.30 £931.20
July 31 1/8/13 £74.10 £71.71 £1005.30 £933.59

* The first mortgage payment is bigger than the subsequent normal monthly mortgage payments because there is more mortgage interest due as the mortgage starts part way through the month.
** Your offset benefit will accrue from the day you deposit funds into your Offset Saver Account and each month it will be applied to the mortgage payment for the following month.

For more detailed information about offset, which we recommend you read, please see our Offset FAQs.

Try our offset calculator to see how you could benefit from offsetting your savings against your mortgage.

 


Summary Box
Key Product Information for our Savings Account(s)
Account Name Offset Saver Account
Interest Rates(AERs) No interest is earned
Tax Status N/A
Conditions for Bonus Payment N/A
Withdrawal Arrangements Unlimited withdrawals
Access Internet, telephone or postal banking.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.