Offset mortgages

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.

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.

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.

**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 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 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.