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Offset mortgages

Offset  mortgages  can be a great way to manage your money, but they can be complex. The simplest way to see if an offset mortgage is right for you is to compare a range of deals in one place. So let us help you through the mortgage maze.

Offset  mortgages  can be a great way to manage your money, but they can be complex. The simplest way to see if an offset mortgage is right for you is to compare a range of deals in one place. So let us help you through the mortgage maze.

Tobi Owens
From the Mortgages team
6
minute read
Do you know someone who could benefit from this article?
Posted 21 MAY 2020

What is an offset mortgage?

With an offset mortgage, you can use savings in a linked bank account to reduce the interest you pay on your mortgage. So if you have a £100,000 mortgage and £20,000 in savings, the savings are used to offset the mortgage and you pay interest on just £80,000.

This works differently to a standard mortgage, where you pay interest on the total amount owed. That means an offset mortgage could save you thousands of pounds in interest and charges over the mortgage term.

How does an offset mortgage work?

If you had a £100,000 mortgage and £10,000 in savings offset against it, you’d only pay interest on £90,000 of the mortgage.

So instead of paying, say, 3% interest on £100,000 (£3,000) in a year, you’d pay 3% on £90,000 (£2,700) – a saving of £300.

A £10,000 savings account earning 1.5% would yield £150 in a year. So the net saving would be £300 off the mortgage – less the £150 lost savings interest – leaving you £150 in the positive.

Some providers also allow you to link several savings accounts together – including family members who can offset against your mortgage. For details, speak to your provider.

What are the advantages of an offset mortgage?

The interest you’ll save with an offset mortgage almost always beats the interest you’d earn on those savings.

Unless you’re saving in an ISA, any interest you earn through a savings account will attract 20% in tax (more for higher-rate taxpayers) once you’re over your initial £1,000 tax-free earnings. Even if your savings are offset against your mortgage, you can still add to your savings pot and potentially save even more in interest.

What happens if I overpay on my offset mortgage?

Some offset mortgages let you overpay, but some may charge you a higher interest rate for doing so. Remember – if you overpay, you’ll be repaying part of your mortgage and may lose access to this money (unless you want to release equity). This is something to consider if you’re likely to need that cash in the future.

Another way to pay off your offset mortgage quicker is to keep the monthly repayments at the same level you would when paying off the full mortgage. For example, if you had a £200,000 mortgage and £20,000 savings offset against it, you’d only pay interest on £180,000. But, as your monthly repayments will be based on your full mortgage debt (£200,000), you’ll effectively be ‘overpaying’.

By paying off your mortgage early, you’ll be in profit quicker if you’re a buy-to-let landlord. If you’re the homeowner, it means you’ll pay less interest overall and own your property outright that bit faster.

Can I access my savings with an offset mortgage?

Yes. One of the biggest advantages of offset mortgages is that you can still access your savings if you need to. But don’t forget, if you withdraw your savings, that money will no longer be offset against your mortgage. This means your monthly payments will go up. If you end up spending all your savings, it could be worth switching to a different mortgage.

Should I put down a bigger deposit instead of offsetting?

It’s hard to say. As a rule, lenders will offer you a better interest rate with a bigger deposit. But if you keep back some of your deposit savings and offset them in a linked bank account, you’ll pay interest on a lower amount overall. And that way you can also access the cash, should you need it.

If you’re confident with numbers, then do the maths to see which option is best for you. Otherwise, it’s a good idea to consult an expert advisor.

Go to L&C Mortgages

Is an offset mortgage right for you?

Offset mortgages can be a great way to arrange your finances if you have savings that aren’t working well for you because of low interest rates.

If you’re a contractor or self-employed, and have substantial earnings, offset mortgages can be a great way to make the most of your money while you save for your tax bill. While you build up the money in your account, the interest on your mortgage is reduced.

What are the disadvantages of offset mortgages?

There are downsides to offset mortgages. These include:

  • Higher interest rates – you may find yourself paying more interest than you would with a standard repayment mortgage.
  • Smaller choice of lenders – offset mortgages aren’t easy to come by, so you’ll probably have a smaller pool of lenders to choose from.
  • No income from your savings – those savings you place in a linked account to offset against your mortgage aren’t likely to earn any interest.
  • The money could be put to better use – it may be that you’d be better off using those savings to help pay off the mortgage.
  • The sums can be tricky – if you have savings (in ISAs, for example) that give you good financial returns, it could be worth seeking expert financial advice before choosing to offset.
  • They usually require a deposit of 25% – although you can often link your current account, as well as your savings.

Are offset mortgages quicker to pay off?

They can be. If you choose to make repayments based on the full loan amount (rather than the offset amount), you’ll effectively be overpaying your mortgage. That means you’ll pay it off quicker. But some lenders may charge you a higher interest rate for doing this.

Offset mortgage rates

Much like standard repayment mortgages, offset mortgages come with both fixed and variable interest rates. If you go for a fixed rate, you’ll make the same monthly repayments even if Bank of England rates change.

It’s hard to say exactly what interest rate you’ll be offered since so much depends on your individual circumstances. How much you earn, the size of your deposit and how much you want to borrow will all have a bearing on the interest rate you’ll pay.

Can I use an offset mortgage for buy-to-let?

Offset mortgages are available for buy-to-let, but there isn’t a great many to choose from. This could mean you’ll have to meet fairly strict criteria to qualify for one. But if you’re shopping for buy-to-let mortgages, they’re certainly worth investigating.

How much do offset mortgages cost?

If you’re looking to switch your mortgage, you may have to pay a charge. Depending on who you go with, this could be a fixed arrangement fee or a percentage of the loan amount. Some lenders may offer you a deal without fees, but then you could find yourself with legal or other admin costs to pay.

What do I need to get a quote?

To get a quote, you’ll need to know how much your house is worth. This will affect your loan-to-value ratio (LTV) and what interest rates you can access. You’ll also need to know your income (and your partner’s, if you’re making a joint application).

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***For the period 1 December 2019 to 29 February 2020, 13,793 people responded to the recommend question. 12,994 responded with a score of 6 or above, therefore 94.2% are likely to recommend.

Looking for mortgage advice?

Get fee-free offset mortgage advice from our broker partners London & Country Mortgages Ltd (L&C)**. Go to L&C mortgages.

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare the Market Limited. Compare the Market may receive an introducer's fee from L&C, for customers who use this service. All applications are subject to lending and eligibility criteria.L&C will not charge you a broker fee should you decide to proceed with a mortgage.

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