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An offset mortgage uses your savings to lower the interest you pay on your mortgage, but there is much to work out and consider first. Read on to learn more about how offset mortgages work, their pros and cons, and whether offsetting may be suitable for you.
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What is an offset mortgage?
With an offset mortgage, a lender ‘offsets’ the savings you have in a linked account against your outstanding mortgage. The amount of interest you pay is then calculated on the reduced mortgage balance, with your savings taken off.
If offsetting your mortgage means you pay less interest, this could lead to lower monthly payments. Alternatively, you could keep your payments the same and effectively overpay, so that you clear your mortgage sooner.
Some offset mortgages allow you to link more than one savings account, meaning you can reduce the amount of mortgage you are paying interest on further. This may include the option to add the accounts of family members who want to use their savings to offset your mortgage. These family offset mortgages tend to be used by first-time buyers.
How does an offset mortgage work?
With an offset mortgage, it’s important to understand that your mortgage and savings are linked, but not merged. Your savings aren’t being used to pay off your mortgage, and won’t actually reduce your loan amount.
Instead, the amount of savings you have is subtracted from the total mortgage you have left to pay. The net figure is then used as the basis for calculating the amount of mortgage interest you need to pay. So with an offset mortgage, if you have a mortgage of £200,000 and £20,000 in a linked savings account to offset against it, you would pay interest on a mortgage balance of £180,000.
You won’t earn interest on savings in your linked account, but you’ll usually be able to withdraw and deposit money as you would with a normal savings account. However, if you withdraw money, the amount of mortgage interest you pay will rise. Equally, if you put more money into the account, your interest payment could fall. If you have no money in your offset mortgage savings account, you won’t get any offset benefit, and you’ll pay interest on your full outstanding mortgage amount.
How much can you save with an offset mortgage?
Consider the following offset mortgage example. If you have a £200,000 offset mortgage at an interest rate of 4%, with £20,000 in savings in a linked account, in the first year you could expect to pay around £7,200 in interest on the reduced mortgage balance of £180,000. By comparison, the interest payable on the full mortgage balance of £200,000 at the same rate of 4% would be £8,000. In this example, an offset mortgage could save you £800 in interest in the first year alone.
In reality, however, there is more to consider and offset mortgage calculations tend to be more complicated. For example, offset mortgage rates tend to be higher than those available on standard mortgages. Depending on the level of savings you have, and the various rates involved, it could mean that an offset mortgage won’t save you money overall.
At the same time, because savings held in a linked offset mortgage account don’t usually earn any interest, you could miss out on interest by not putting your savings in a traditional savings account. If you can find a savings rate of 5%, a lump sum of £20,000 could potentially return £1,000 in interest in a year, which may be more than you’d save in mortgage interest with an offset mortgage. But tax on savings and other factors can further complicate matters, so no decision should be taken lightly.
If you want to discuss whether an offset mortgage might work for you, or your mortgage options overall, NerdWallet has partnered with L&C, the UK’s leading fee-free mortgage broker, to offer you expert advice.
What offset mortgage rates can you get?
Offset mortgage rates may be either fixed or variable. With a fixed-rate offset mortgage, you’ll know your mortgage rate will stay the same for the period of time you’ve fixed. Alternatively, with a variable rate mortgage, such as an offset tracker mortgage, the rate you pay could rise or fall, usually in line with the Bank of England base rate. This gives you the potential for cheaper mortgage rates in the future, but also comes with the risk that your rate, and your repayments, could increase.
Often you’ll find that interest rates on offset mortgages are higher than on standard mortgages. You’ll need to take this into account when trying to work out if the potential savings from paying less interest due to offsetting more than make up for this.
» MORE: Check the latest mortgage rates
Pros and cons of offset mortgages
There are potential benefits to offset mortgages, but some potential downsides that must be considered too.
What are the advantages of offset mortgages?
Some of the reasons why an offset mortgage might appeal include:
- You could pay less mortgage interest overall, as what you are charged is calculated on your mortgage minus your linked savings.
- In paying less interest, you may be able to lower your monthly repayments, or pay off your mortgage faster if you keep them the same.
- The interest you save on your mortgage may be more than you’d earn in a normal savings account.
- It can help manage the tax you have to pay, because savings interest isn’t usually paid on linked accounts.
- You’ll usually have the option to access your savings if you want to, without penalty charges.
- Parents may be able to use their savings to offset the mortgage of their children, helping them onto the property ladder.
What are the disadvantages of an offset mortgage?
Some of the possible drawbacks of offset mortgages include:
- If you withdraw money from your savings account and the balance reduces, what you pay in interest will go up. You may also need to retain a minimum balance.
- Offset mortgage rates may be higher than standard mortgage rates.
- Fewer lenders offer offset mortgages, so you’ll have fewer deals to choose from than with a standard mortgage.
- You may need a larger deposit or more equity than with standard mortgages, perhaps equivalent to at least 20% or 25% of the property value.
- You won’t earn interest on money in your linked savings account.
- You may have to move the savings you want to use to offset to a specific linked account offered by the lender.
Is an offset mortgage right for me?
As with any mortgage, your personal circumstances play a huge part in deciding whether an offset mortgage is right for you. However, an offset mortgage may be more suited to you if:
- You have a large amount of savings that you don’t rely on to supplement your income or need for anything else.
- You can leave the funds you put into the linked account untouched for a good length of time.
- Your savings earn you less in interest than you save offsetting them against your mortgage.
- You are a higher-rate or additional-rate taxpayer who pays income tax on savings interest. This is because you won’t earn interest on your linked savings.
- You’re self-employed and have to keep money on hand for your business, tax obligations and emergencies that could be used in an offset mortgage in the meantime.
- You want to help someone buy a home while retaining access to your money.
Your lender will also want to work out whether it thinks an offset mortgage is a good fit for you. They’ll look at your finances to consider if the mortgage will be affordable for you both now and in the future. Your outgoings and income, along with other factors, including the size of the mortgage, and the level of savings you have, will all be considered. Offset mortgages typically require a bigger deposit of at least 20%, and sometimes higher, but you’ll also need further savings available to offset against your mortgage. Unless your family is supporting you, this tends to leave offset mortgages out of reach of many first-time buyers.
» MORE: Best mortgage lenders
Are offset mortgages a good idea?
An offset mortgage may be worth considering if you want to reduce the mortgage interest that you pay and have a large amount of savings. You’ll still have access to your savings, and can help minimise the tax you may have to pay if the money was in a traditional interest-bearing savings account.
However, that you are giving up earning interest on your savings can also be considered a downside to offset mortgages. And if you need to access your funds, the amount of interest you pay on your mortgage will rise. Also, be aware that the actual interest rates charged on offset mortgages are typically higher than those on regular mortgages. It’s important to do your sums to establish that you have enough in savings to make an offset mortgage worthwhile.
» MORE: See current mortgage rates
Offset Mortgage FAQs
A number of banks and building societies offer offset mortgages in the UK, but they are less common than other types of mortgages.
To get an offset mortgage you may need a larger deposit or equity of 20%, or maybe 25%, of the value of the property you’re buying. By comparison, it’s possible to get a standard mortgage with a 5% deposit.
As with any mortgage, the amount you can borrow with an offset mortgage will depend on your finances and what a lender believes you can afford. All lenders are required to look in detail at your income and expenditure to get an idea of what you can afford to repay, not only today but in the future if interest rates increase. Your credit score, existing debt, and the deposit or equity you have will be important too.
It should be possible to access the savings you put into an offset mortgage, though if you do, you’ll pay more interest. Note as well that some offset mortgages specify a minimum balance that you must retain in your linked account.
If offsetting your mortgage means you pay less interest, this could allow you to lower your monthly repayments. Alternatively, you could keep your payments the same and effectively overpay, so that you clear your mortgage sooner.
Many offset mortgage lenders will allow you to offset your entire mortgage amount. If you do have enough savings in your linked account to cover 100% of your mortgage, you won’t have to pay any interest.
If you have a repayment offset mortgage, you’ll still have a monthly repayment to make, but there’ll be no interest in that amount. If you have an interest-only offset mortgage, you may not have to make a repayment.
Even if the balance of your linked offset mortgage savings account is greater than your outstanding mortgage amount, you shouldn’t expect to receive interest on this excess amount. In this situation you may want to move the surplus funds to a savings account where you could earn interest.
A larger deposit usually opens the path to lower mortgage rates, as you’re borrowing at a lower loan-to-value. On the other hand, putting a large amount of savings towards an offset mortgage can reduce the size of the mortgage you’re paying interest on.
Taking the time to research different mortgages and do some calculations is vital. Getting mortgage advice can help if you’re unsure.
The main difference is that you can usually access the savings that are linked to an offset mortgage, whereas you can’t once you’ve overpaid on a standard mortgage.
An offset mortgage is linked to your savings, which you can access any time to make deposits and withdrawals. However, your savings are not being used to pay off what you owe; they just sit alongside your mortgage to reduce how much interest you pay. If you pay more into your linked savings account, it will reduce how much interest you are charged. But you can usually withdraw that amount later, if you wish.
By contrast, overpayments on a standard mortgage, whether as a one-off lump sum or regular payments, are extra payments, which can help clear your debt sooner and reduce how much interest you pay. However, once an overpayment is made, it’s not normally possible to get those funds back.
Yes, it is possible to remortgage to an offset mortgage deal. You may be thinking of remortgaging to an offset mortgage because you have built up your savings, received an inheritance, or had a pay rise, and want to use the additional funds to lower the mortgage interest you pay.
» MORE: Compare remortgage deals
Interest-only offset mortgages are available, where you only pay the mortgage interest you owe each month and not any of the original loan amount. Monthly repayments on an interest-only mortgage are lower than on an equivalent capital repayment mortgage, but you’ll need a plan for paying back the full mortgage loan at the end of your mortgage term.
» MORE: Should I get an interest only or repayment mortgage?
Some lenders offer buy-to-let offset mortgages to landlords but they are rare.
» MORE: Buy-to-let mortgages
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