Offset mortgages
Offset mortgages involve offsetting your savings against your mortgage balance to help you pay less interest. Find out more about how they work and whether an offset mortgage could be right for you.
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.
Your savings aren’t used directly to pay off your mortgage, though. Instead, their value is deducted from your mortgage balance – and you only pay interest on what’s left.
An offset mortgage works differently to a standard mortgage, where you pay interest on the total amount you owe. It means you could save thousands of pounds in interest over the length of an offset mortgage.
But keep in mind that the interest rate on an offset mortgage is likely to be higher than for a standard mortgage.
You can’t compare offset mortgages with Compare the Market. But we’ve partnered with L&C Mortgages** to provide you with fee-free mortgage advice. If you’d like to discuss the possibility of an offset mortgage, you can get in touch with one of their advisors here.
Go to L&C Mortgages**L&C Mortgages 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.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
How does an offset mortgage work?
Here’s an example of how an offset mortgage works:
Your mortgage: £200,000
Your savings: £20,000
With an offset mortgage, you only pay interest on £180,000 of the mortgage, instead of the full £200,000. That equals a 10% saving on the amount of mortgage interest you’d have to pay.
Some mortgage providers let you link additional savings accounts to your mortgage – and these extra accounts can even belong to friends or relatives. Check with your mortgage provider to see if this is possible.
Can I still access my savings with an offset mortgage?
Yes. One of the biggest advantages of an offset mortgage is that you can still access your savings if you need to.
But if you do take money out of your savings account, it will reduce the amount you can offset against your mortgage. This means your monthly mortgage repayments will go up. Plus, some lenders may insist you keep a minimum balance in your savings account.
If you’re likely to need to spend your savings, it could be worthwhile considering a different type of mortgage. Conversely, if you keep topping up your savings linked to your offset mortgage, you’ll further lower your mortgage payments.
Should I put down a bigger deposit instead of offsetting?
Typically, the bigger your mortgage 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 you’ll also be able to access the cash if you need it.
If you’re confident with numbers, do the maths for your circumstances to see which option could be best for you. Otherwise, it’s worth consulting a mortgage advisor.
Our partner L&C Mortgages** can give you fee-free mortgage advice. Get in touch with one of their advisors here.
Go to L&C Mortgages
What’s the difference between offsetting and overpaying?
The key difference between offsetting and overpaying is that when you overpay your mortgage, the money you use to do it is effectively ‘spent’ – you can't easily access it later if you need it; you'd need to release equity through remortgaging.
But if you offset your mortgage, you can still access your savings if needed. You can withdraw cash at any time, although – in turn – that money will no longer offset your mortgage and so your monthly repayments will increase.
What happens if I overpay on my offset mortgage?
Most lenders will let you overpay on your offset mortgage – typically up to 10% a year. Check with your mortgage provider to be sure. If you do overpay, you may have to pay an early repayment charge if you go beyond any limit detailed in your mortgage agreement.
Overpaying your offset mortgage means you’ll pay less in interest, which reduces the overall cost of your mortgage. You’ll also pay off your mortgage earlier, freeing up cash for travel, retirement or other long-term plans you might have.
Are offset mortgages quicker to pay off?
An offset mortgage can be quicker to pay off. If you choose to make repayments based on the full mortgage amount, rather than the offset amount, you’re effectively overpaying your mortgage. This means you’ll repay it quicker.
What are the advantages of an offset mortgage?
There are several benefits to offset mortgages, including:
- Lower borrowing costs – you could save more on your mortgage interest than you would have earned in a savings account.
- Flexibility – you can still access your savings if you need to.
- Family help for first-time buyers – some lenders let you offset your savings against your child’s mortgage, which can help your kids get onto the property ladder.
- Tax advantages – particularly if you’re a higher or additional rate taxpayer. Because you won’t earn interest on your savings, you won’t pay tax or use up your Personal Savings Allowance.
What are the disadvantages of offset mortgages?
There are downsides to even the best offset mortgages. These include:
- Higher interest rates – even with the cheapest offset mortgage, you may be charged a higher rate of interest than for a standard repayment mortgage.
- Smaller choice of lenders – not many lenders offer offset mortgages, so you might have fewer deals to choose from.
- No income from your savings – you won’t earn any interest on the saving accounts linked to your offset mortgage.
- The money could be put to better use – it might be more beneficial to use your savings for a bigger deposit or to overpay a standard mortgage.
Is an offset mortgage right for me?
To make an offset mortgage worthwhile, you typically need a large amount of money in a linked savings account that you can afford to leave untouched.
If you’re not sure if an offset mortgage is right for you, it’s worth talking to a mortgage advisor who’ll be able to give you expert advice on your options.
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 many deals to choose from and you may have to meet strict criteria to qualify.
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 mortgage is linked to a family member’s savings account, reducing the mortgage balance. The money still belongs to its owner and only they can access it; it’s simply linked to the offset mortgage of the younger person.
Some lenders let you link up to two additional savings accounts to an offset mortgage – and they can belong to friends or family.
How do offset mortgages work with tax?
Unless your savings are held in an individual savings account (ISA), you’re liable to pay tax if the interest you earn 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 interest on your cash. And that means you won’t pay tax on your savings income or use up your Personal Savings Allowance.
