Savings-linked and bank savings mortgages explained
A savings-linked mortgage combines a loan with an insurance policy that builds up money for repayment. With a bank savings mortgage, the savings build up in a linked, restricted bank account. The savings component does not reduce the loan each month: repayment takes place using the amount built up.
Responsible for the content: Ricardo Roso. Updated on .
The loan and savings product belong together
You pay mortgage interest on the loan. You also pay premiums into a savings insurance policy or make deposits into a bank savings account. Together with the interest earned, those savings are intended to repay the linked loan component at maturity. For insurance, also check what portion of the premium pays for any death cover or costs.
Assess both components together. Looking only at the current loan balance does not give the full picture; neither does looking only at the savings balance. Compare the debt, accumulated value, agreed target capital and remaining term.
What is the difference between insurance-based savings and bank savings?
With a traditional savings-linked mortgage, the savings product is an insurance policy, with its own policy conditions and possibly a payment on death. With bank savings, the money is held in a restricted account. Term life insurance is not automatically part of that arrangement in the same way. Your own agreements must show what cover you have.
In many linked products, the savings interest rate equals the mortgage interest rate. A fall in interest rates may then reduce the interest payment while requiring a higher premium or deposit to reach the agreed target amount. A lower mortgage interest rate therefore does not automatically produce an equally large reduction in the total monthly cost of this combination. Check how the rates are linked in your product conditions.
Mainly relevant to existing mortgages
Since 2013, you have no longer been free to start a new tax-favoured endowment insurance policy or savings account for an owner-occupied home. Continuing or converting an existing entitlement may be possible under conditions. The original start date, contract history and tax rules therefore matter more than the current product name alone.
For new loan components, an annuity mortgage and a linear mortgage are often compared.
Do not cancel solely because of a low interest rate
Additional repayments, additional deposits, moving home or remortgaging may change the savings and tax treatment. Conditions apply to the tax exemption for a payout, including using it for repayment and rules on premiums or deposits. Not every payout is therefore completely tax-free.
Before cancelling or surrendering the product, ask for a comparison of continuing, changing and ending it. Include what happens to the accumulated value, any insurance cover, costs and remaining debt. Also check whether the loan and savings product end on the same date.
Which information helps with an assessment?
Have the original mortgage offer, the policy or bank savings agreement and the latest annual statement ready. A recent interest rate proposal and a summary of earlier changes make the picture more complete. This helps prevent a decision about one component from having unexpected consequences for the other.
- What is the target capital and when does it become available?
- Which premiums or deposits do you still need to pay?
- What happens on death, moving home or early termination?
Discuss your existing loan through mortgage advice at RFD. The maximum mortgage calculator does not calculate the position of your existing savings product.
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Frequently asked questions
Is my savings-linked mortgage an ordinary interest-only mortgage?
Neither debt falls automatically through monthly principal repayments. However, a savings-linked mortgage includes a linked savings product intended for repayment later. That product must be included in the assessment.
Can a lower interest rate increase my savings deposit?
Yes, if the savings interest rate is linked to the mortgage interest rate. With less interest earned, a higher deposit may be needed to reach the same target capital on time.
Can I spend the amount I have built up freely?
The money is intended for repayment and may be restricted or pledged. Withdrawing it freely or ending the product may have contractual and tax consequences; have these assessed beforehand.
This is general information, not personal mortgage advice or a finance offer. Your options and the tax implications depend on your circumstances and the provider's terms. Read the disclaimer.
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Sources for this guide
General information from RFD. Sources consulted on . Rules and terms may change.
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