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.

Mark Gordon
From the Mortgages team
8
minute read
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Posted 24 SEPTEMBER 2021

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. If you have a £100,000 mortgage and £20,000 in savings, the savings are used to offset the mortgage. That means you only pay interest on £80,000.

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

How does an offset mortgage work?

If you have a £100,000 mortgage and £10,000 in savings offset against it, you’ll only pay interest on £90,000 of the mortgage. That means instead of paying, say, 3% interest on £100,000 (£3,000) in a year, you’d pay 3% on £90,000 (£2,700). So you’d save £300.

A £10,000 savings account earning 1.5% would earn £150 in a year. Which means offsetting your mortgage leaves you £150 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 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.

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?

It’s hard to say. 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 advisers 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 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.

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?

With today’s rates, the interest you’ll save with an offset mortgage will almost always beat the interest you’d earn on your savings.

Unless you’re saving in an ISA, you’ll have to pay 20% tax on any interest you earn with a savings account once you’re over your initial £1,000 tax-free earnings (if you’re a higher-rate taxpayer, you’ll pay 40% tax). Whereas if your savings are offset against your mortgage, you can still add to your savings pot and potentially save more on your interest payments.

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

If you’re a contractor or self-employed and are a higher rate taxpayer, 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 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 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%.

Is an offset mortgage right for you?

Whether an offset mortgage is right for you will very much depend on your personal circumstances. It could be worth talking to a financial advisor to see if it makes sense for you.

Why use Compare the Market?

92.4% of users would recommend Compare the Market to friends or family***

***For the period 1st March to 31st May 2021, 9,781 people responded to the recommend question. 9,033 responded with a score of 6 or above, therefore 92.4% 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) 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 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.

Frequently asked questions

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 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.

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