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Offset Mortgages Explained

When you come to get a new mortgage, your mortgage options are not limited to a standard repayment mortgage. If you have a savings account with a particular lender, you have another mortgage option: an offset mortgage.

But what is an offset mortgage? And should you consider this option?

In this guide, we will explain more about offset mortgages and the advantages and disadvantages of this type of mortgage.

If you would like to know more after reading this guide, get in touch with our expert mortgage team, and we will support you with all of your mortgage needs and questions.

What is an offset mortgage?

An offset mortgage is a type of mortgage that is linked to the savings account you hold with the same lender.

The offset mortgage allows the money in your savings account to be linked to the mortgage to reduce the size of your outstanding home loan, thus reducing the interest you pay. However, the savings are not used to pay off your mortgage so don’t have to worry about your savings disappearing.

So, rather than earning interest on your savings, you reduce the interest payable on your mortgage loan amount instead. This means your monthly payments can be lower as rather than paying interest on the full mortgage loan you only pay the interest on the remaining mortgage balance after your linked savings have been subtracted. An example is given below.

Lets see how much you could save with an offset mortgage

How does an offset mortgage work UK?

Offset mortgages work differently from traditional repayment mortgages.

If you were to take out a £200,000 repayment mortgage, for example, you would pay the mortgage interest on the full amount.

But if you were to take out a £200,000 offset mortgage and you had £20,000 in savings, you would pay interest on £180,000 because the money in your offset savings account would be used to offset the size of your outstanding mortgage balance.

As such, the size of your mortgage monthly payments would be reduced. But while this would be ideal for you if you wanted to reduce the interest payable on your loan and mortgage balance, you need to know that you wouldn’t earn interest on the £20,000 in your savings account. It’s also worth noting that you are likely to save money as you will pay less tax on your savings.

Should I get an offset mortgage?

It depends on your personal circumstances. If you’re a higher-rate taxpayer, offset mortgages can be tax-efficient as you won’t have to pay tax on any savings interest. As such, your Personal Savings Allowance won’t be affected.

Offset mortgages can also be recommended if you don’t intend to dip into your savings as you will be able to pay off your mortgage sooner.

With mortgage rates increasing rapidly in late 2022 people’s interest in offset mortgages has increased very quickly. It’s been our observation that if you have significant savings making little savings interest and a mortgage that now has a high-interest rate you will almost certainly benefit from lower monthly payments.

If you do intend to dip deeply into your savings, an offset mortgage might not be of benefit to you it as the more you withdraw from your savings account, the less money there would be to offset against your mortgage balance. This will increase the interest you pay. Therefore, a standard mortgage, such as a repayment mortgage, may be better for your needs.

For further advice, speak to a member of our team and we will explore all of your mortgage options with you.

Is an offset mortgage worth it?

Again, this depends on your personal circumstances but for some people, an offset mortgage is worth it as they can either reduce their monthly mortgage payments or reduce their mortgage term. You can see examples of this below.

Payment reduction

If you were to take out a standard mortgage of £200,000 over a 20-year mortgage term and an interest rate of 2%, you would have to pay £1,012 a month towards your mortgage balance.

But with an offset mortgage, you could reduce your payments. So, if you had £50,000 in a linked savings account, you would only need to pay interest on £150,000 instead of the full £200,000. This would make a significant impact on your mortgage payments as you would only need to pay £759 a month over the 20-year mortgage term.

Term reduction

Your other option is to overpay on your mortgage and pay off your mortgage early. You can do this by keeping your monthly payments the same without offsetting your savings to reduce them.

So, if you were to offset £50,000 on a £20,000 mortgage with the interest rate we mentioned, you would overpay by £253 a month and reduce the term of your mortgage. You would pay less interest on your mortgage too as you would be able to clear your mortgage debt early.

How much money can you save with an offset mortgage?

An offset mortgage will allow you to pay less than the average mortgage repayment. How much you save will depend on how much of your savings you want to offset and how long you leave your savings in place without dipping into them.

You can use a mortgage calculator to calculate how much you will save but check out the examples below for an idea of the savings you could make with a small and a large savings account balance.

Lets see how much you could save with an offset mortgage

An example of a savings account balance of £5,000

If you had a mortgage that was worth £200,000 with a mortgage duration of 20 years and a mortgage interest rate of 2%, you could reduce the interest you would have to pay if you had £5,000 in a linked savings account. This is because you would only pay interest on £195,000.

If you keep your monthly payments as they would be on a £200,000 mortgage, you would save £454 in interest and pay off your mortgage loan 2 months early.

If you keep the mortgage term the same and make lower monthly repayments, you would reduce your mortgage payments by £8.26 a month. Over the loan term, you would reduce the total amount of interest by £1, 983.

In both cases, you would still retain your lump sum of £5,000.

An example of a savings account balance of £20,000

You make more savings with a larger savings balance.

If you keep your monthly payments as they would be on a £200,000 mortgage, you would save £1,7555 in interest and pay off your mortgage 9 months early.

If you keep the mortgage term the same and make lower monthly repayments, you would reduce your mortgage payments by £32.01 a month. Over the loan term, you would reduce the total amount of interest by £7,683.

In both cases, you would still retain the lump sum of £20,000.

Family offset mortgages

Getting on the property ladder is rarely easy, especially with the rising price of houses that demand a larger deposit and higher income sizes. However, buying a house can be made more affordable with a family offset mortgage.

So, if you have children who are looking to buy their first home, you can reduce the total amount they need to borrow by putting up your savings to offset their mortgage. So, if your child required a £250,000 mortgage deal and you had £50,000 in savings, for example, you could link this to their mortgage to reduce the loan size to £200,000.

This could make it easier for your child to pass the lender’s affordability checks as they wouldn’t owe as much in interest.

For further advice on how family offset mortgages work, get in touch with a member of our team and we will explain them in more detail to you.

Advantages and disadvantages of an offset mortgage

As with any type of mortgage, there are a few pros and cons that need to be considered when you’re weighing up your options.

The advantages of an offset mortgage include…

  • If you’re a higher-rate or additional-rate taxpayer, you don’t have to pay tax on your offset savings
  • You can choose to lower the repayments on your mortgage or reduce your loan term
  • You can access your linked savings account if you need to make withdrawals
  • The more money there is in the linked savings the less interest you will need to pay
  • You don’t have to offset your own money if you have a family offset mortgage

The disadvantages of an offer mortgage include…

  • You won’t earn interest on your savings in the linked account
  • Mortgage interest rates on offset mortgages are often higher than the interest rates on repayment mortgages
  • The loan to value can be lower on offset mortgages so you may require a deposit of up to 25% of the property value
  • Not many mortgage lenders offer offset mortgages
  • The mortgage repayments on your offset mortgage will increase if you tap into your linked savings account
  • You might not be able to access all of your savings as some lenders require a minimum balance in your offset savings account
Lets see how much you could save with an offset mortgage

Tell me the difference between fixed and variable rate offset mortgages

As with a traditional mortgage, you can choose an offset mortgage that comes with a fixed-rate or variable rate of interest.

Fixed-rate offset mortgages

With a fixed-rate offset mortgage, the interest rate is fixed for an initial period, usually between 2-10 years, so you can have the peace of mind that your mortgage repayments won’t change because of mortgage interest rate rises. Of course, if interest rates fall, you won’t benefit from the decrease.

Variable rate offset mortgages

With a variable rate offset mortgage, the mortgage interest will rise and fall over the loan term, so this can affect your payments. If you take out a tracker rate offset mortgage, the interest rate will be dependent on the Bank of England base rate, and if you take out a Discount offset mortgage, the interest rise will be determined by the discount applied to the lender’s standard variable rate.

Offset Mortgage Advice

How to get the best offset mortgage rates

To get the best-offset mortgage deal, you should speak to a specialist mortgage broker. They will search the market on your behalf and will find you the deal that is best suited to your circumstances.

If you’re interested in a mortgage that is linked to your offset savings account, get in touch with the expert team at YesCanDo Money. We will compare mortgages on your behalf and will make sure you save money by finding the mortgage lenders that offer the best-offset mortgage deals.

Get in touch with us using the contact form below and we will give you a call back to arrange your first appointment with us. As a family run mortgage broker we will then give you more understanding and look for the best rate offset mortgage for you and how it compares to a traditional mortgage. After exploring all of your options with you, we will then support you with your mortgage application.

As a FEE-FREE mortgage broker will do all of this and more so you are guaranteed to save more money if you decide to use our services.

Lets see how much you could save with an offset mortgage

Frequently Asked Offset Mortgage Questions

Yes, you can still access your savings with an offset mortgage. But while this can be useful, you will reduce the amount you can offset against your mortgage balance if you dip into your savings balance. This means your monthly payments will become higher.

Bear in mind that some lenders will require you to have a minimum balance in the savings accounts linked to your offset loan so you might not be able to access all of your savings.

It’s unlikely that you will find a mortgage lender willing to let you offset 100% of your mortgage. However, if you’re looking to get a mortgage without a deposit, you could opt for a guarantor mortgage if a loved one is willing to help you buy a home.

If money is tight and you want to reduce your monthly payment as much as possible, you can reduce the interest charged on your home loan via the offset account linked to your mortgage account. This is one way of saving money on your mortgage.

If you can afford to make your monthly payments, you could use your offset savings account to reduce your loan term instead. Instead of opting for lower monthly payments, you will instead pay off your mortgage balance more quickly.

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Steve Roberts
Steve Roberts

Stephen Roberts MAQ is the founder of YesCanDo Money, one of the UK's largest no-fee mortgage brokers. With over 30 years of mortgage experience, he has advised and helped thousands of first-time buyers buy their first home and home movers buy their dream home. Speak to a mortgage expert today by completing our contact form:

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