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Offset mortgages

Offset mortgages can be a great way to manage your money, but they can also be complex. The easiest 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 also be complex. The easiest 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.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
22 DECEMBER 2022
7 min read
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What is an offset mortgage?

An offset mortgage lets you use savings in a linked bank account to reduce the interest you pay on your mortgage. Just to be clear – your savings aren’t used directly to pay off your mortgage. Instead, their value is taken off your mortgage balance to lower the total interest you’ll be charged.

Offsetting works differently to a standard mortgage, where you pay interest on the total amount you owe. Over the length of a mortgage (the term), an offset mortgage could save you thousands of pounds in interest and charges.

How does an offset mortgage work?

Your mortgage provider will put your savings into an offset account, with their value used to counterbalance the debt on your home loan. Here’s an example of how an offset mortgage works:

If you have a £100,000 mortgage and £20,000 in savings offset against it, you’ll only pay interest on £80,000 of the mortgage. That means instead of paying, say, 5% interest on £100,000 (£5,000) in a year, you’d pay 5% on £80,000 (£4,000). So you’d save £1,000.

A £20,000 savings account earning 3% interest would bring in £600 in a year. Which means offsetting your mortgage leaves you £400 better off than you would be if you left the money in a savings account.

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

Can I still 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, it will reduce the amount you can offset against your mortgage. This means your monthly payments will go up. Some lenders will also insist you keep a minimum balance in your savings account.

If you need to spend your savings, it could be worth switching to a different mortgage. On the flip side, if you keep topping up your savings, you’ll reduce your mortgage interest payments.

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’re effectively 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, the same rate will apply even if the Bank of England interest rates change.

It’s hard to say what interest rate you’ll be offered, since whether you’ll be accepted for a particular mortgage 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 this.

Should I put down a bigger deposit instead of offsetting?

As a rule, the bigger your deposit, the better interest rate you’ll be offered. 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 if you need it.

If you’re confident with numbers, do the maths to see which option is best for you. Otherwise, it’s worth consulting a mortgage advisor. We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice. Get in touch with one of their advisors here.

Go to L&C Mortgages

**London & Country Mortgages Ltd (L&C) is a multi-award-winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, which is authorised and regulated by the Financial Conduct Authority (143002).

L&C is not part of Comparethemarket Limited. Comparethemarket 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.

What’s the difference between offsetting and overpaying?

  • Overpaying your mortgage – paying more than the required amount – may sting in the short term, but it means you can be mortgage-free sooner. And some mortgage providers may let you borrow back overpayments, so you won’t be stuck if you find you need the money later. Just be aware that by paying off your mortgage early, you could incur early repayment charges.
  • Offsetting your mortgage lets you balance your savings against your mortgage, so you only pay interest on the difference.

What happens if I overpay on my offset mortgage?

Some offset mortgages let you overpay, but you may have to pay early-repayment charges. Check with your mortgage provider.

Another way to pay off your offset mortgage more quickly is to keep your repayments at the level you would if you were 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, if your monthly repayments are based on your full mortgage debt (£200,000), you’re effectively ‘overpaying’.

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

What are the advantages of an offset mortgage?

There are several benefits to offset mortgages, including:

  • Lower borrowing costs – the interest you’ll save with an offset mortgage will generally beat the interest you’d earn on your savings.
  • Flexibility – you can usually still access your savings if you need to, making your finances more flexible.
  • Family help for first-time buyers – parents can help their kids get onto the property ladder as some lenders will let you offset your savings against your child’s mortgage.
  • Tax advantages – if you’re a higher rate taxpayer, offset mortgages can be a good way to make the most of your money. Your savings will bring down your interest payments and you won’t face a tax bill.

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 won’t earn any interest.
  • The money could be put to better use – it may be that you’d be better off using those savings to put down a bigger deposit or overpay your mortgage.
  • They usually require a deposit of 25% – it’s possible to find deals with a lower deposit, but lenders tend to reserve these for existing customers who are switching to an offset deal.

Is an offset mortgage right for me?

Whether an offset mortgage is right for you will very much depend on your personal circumstances. If you only have a relatively small amount of savings (for example, less than £5,000), you could be better off searching for the lowest rate mortgage deal available to you.

To make an offset mortgage worthwhile, you’ll generally need a large amount of money that you can afford to leave untouched in a linked savings account. If you’re not sure if an offset mortgage is right for you, it’s always worth talking to a financial advisor who’ll be able to give you expert advice on your options.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Frequently asked questions

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

Offset mortgages are available for buy-to-let, but there aren'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 is a family offset mortgage?

A family offset mortgage can be a great way for parents or grandparents to help younger family members get on the property ladder. The way it works is that the mortgage is linked to a wealthier family member’s savings account, reducing the amount borrowed. 

Let’s say a child has a £50,000 deposit and borrows £200,000 on an 80% loan to value mortgage. The parents’ savings of £50,000 could be offset, so the child would only pay interest on £150,000.

How do offset mortgages work with tax?

Unless your savings are held in an ISA, interest you earn on them is liable for tax if the interest is more than £1,000 a year for a basic rate taxpayer and £500 a year for a higher rate taxpayer. If you offset your savings against your mortgage you won’t earn any interest on them, but you’ll pay less interest on your mortgage – and this saving won’t incur any tax.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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Alex Hasty - Insurance comparison and finance expert

At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.

Learn more about Alex

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