Offset Mortgages

Offset mortgages

Offset mortgages are a flexible mortgage type that lets you save money on your interest repayments by using your savings to ‘offset’ the amount you owe. 

Offset mortgages can be a little more complicated than a traditional mortgage, with a few additional factors to consider.  

In this guide, we take a look at how offset mortgages work, the pros and cons and whether they are the right mortgage option for you. 

They’re regaining popularity at the moment due to rising interest rates in the UK after a prolonged period of record-lows (since 2008). 

Offset Mortgage Key Takeaways 

• An offset mortgage lets you link your savings and your mortgage account, using your savings to offset your mortgage balance. This means the mortgage balance you pay interest on is reduced by your savings amount. 

• If you have a large mortgage balance or significant savings, an offset mortgage can be an effective way to save money on your mortgage interest. 

• Offset mortgages can use your savings, current account balance or your family’s savings depending on the mortgage type.  

• You will have access to your savings during your mortgage term, but you will not earn any interest on them as they’ll be allocated to your mortgage. 

What is an offset mortgage? 

An offset mortgage allows you to link your savings account to your mortgage.  

A savings account earns you interest on your balance, while a mortgage charges you interest on your balance.  

So, one offsets the other with an offset mortgage. 

Your savings are effectively used to reduce the amount of mortgage loan you are paying interest on, reducing the amount of interest you pay on your mortgage overall.  

The interest of your offset mortgage is calculated based on your mortgage amount minus the amount of your savings.  

For example, if your mortgage is £150,000 and you have £20,000 in savings, you will only pay interest on £130,000 of your mortgage.  

Instead of earning interest on your savings, you use the balance to lower the interest of your mortgage.  

How do offset mortgages work? 

Let's take a look at how an example offset mortgage works compared to a traditional mortgage.  

As you can see, the mortgage balance and interest rate are the same, but due to the £50,000 in savings being offset against the balance over the term of the mortgage the interest paid is significantly less. 

The above is an example only, and savings may differ based on your own financial circumstances.

If you are considering an offset mortgage, it is important to compare different lenders and products to find the best deal for you.

You should also speak to a financial advisor to get advice on whether an offset mortgage is right for you. 

Pros and Cons of an Offset Mortgage  

Offset Mortgage Pros: 

• Lower interest repayments - as you’re paying interest on a smaller amount than your total mortgage, you can save money on interest repayments, reducing the overall cost of your mortgage during the mortgage term. 

• Keep access to your savings - You can still access your savings as and when you need, this would just reduce the amount you are offsetting at the time. This can make an offset mortgage more appealing than paying a lump sum off your mortgage and no longer being able to access those funds. 

• Potential tax benefits - as you would normally have to pay tax on some savings interest accounts, you can avoid this by offsetting your savings instead. 

Offset Mortgage Cons: 

• Higher interest rates - overall offset mortgages tend to have higher interest rates than the standard mortgage, so it is important you weigh up the cost differences and potential savings you can make. If your savings aren’t going to offset a significant part of the mortgage debt, then it may be cheaper to get a standard mortgage and keep the returns of your savings account.  

• Strict eligibility criteria - Criteria for offset mortgages can be more complicated than a normal mortgage. You may have a higher LTV to consider or a minimum savings threshold you need to meet before being suitable.  

• Limited products - not all lenders offer offset mortgages, so you may be limited in the choice of products available to you.  

• No interest on your savings - you’re unlikely to be eligible for interest on your savings if your interest rate on your savings is lower than your mortgage 

As you can see, offset mortgages and their benefits regarding cost savings are more complex than comparing a normal mortgage interest rate with another. 

So, it's good idea to seek independent mortgage advice in order to make the best financial decision for your own personal circumstances. 

Who are offset mortgages for?

Offset mortgages aren’t for everyone, and are best suited to the following situations: 

Applicants with significant savings - Typically you will only start to see worthwhile savings on your mortgage costs if you have significant savings.  

Applicants with large mortgage amounts - As above, generally the bigger the mortgage loan the more potential you have of saving on the costs of interest.  

Higher rate taxpayers - As well as saving on interest repayments you also save money on the tax you would have paid on the interest of your savings (if you’re earning enough in interest to pay tax on it). 

Types of Offset Mortgages  

There are several types of offset mortgages available, mainly based on the savings account you offset it with:

Current account mortgages (CAMs) 

CAMs combine your mortgage, savings, and current account into one account. Your salary is paid directly into the account, and your mortgage payments are deducted from it.  

Any surplus funds in the account offset the mortgage balance, reducing the interest you pay. 

Savings account offset mortgages 

This type of offset mortgage links your savings account to your mortgage account.  

Your savings balance is offset against your mortgage balance, reducing the interest you pay.  

Unlike CAMs, your savings and mortgage accounts remain separate, which may be preferred for some. 

Family offset mortgages 

Family offset mortgages allow your family members to link their savings accounts to your mortgage account, helping you to reduce the interest you pay on your mortgage.  

This can be particularly useful for first-time buyers who may not have their own savings or have used a smaller deposit when buying their property. 

Fixed rate offset mortgages 

Fixed rate offset mortgages offer a fixed interest rate for an initial period. This could be anywhere from 2-10 years, depending on the mortgage.  

Fixed rate offset mortgages offer certainty and stability in your monthly payments.  

Once the fixed-rate period ends, the mortgage usually reverts to the lender's standard variable rate, or you can use this as an opportunity to remortgage to find a better deal.  

Variable rate offset mortgages 

With variable-rate offset mortgages, the interest rate can fluctuate based on the lender's standard variable rate or the Bank of England base rate.  

This type of mortgage may offer lower initial interest rates but can be less predictable in terms of monthly payments and can increase beyond affordability if the interest rate increases. 

When considering an offset mortgage, it's important to research the various types available, weigh up the pros and cons of each and consult a mortgage advisor to determine which option is best suited to your financial situation and mortgage goals. 

How to Get an Offset Mortgage 

To get an offset mortgage, follow these steps: 

Research and compare lenders  

Start by researching different lenders and their offset mortgage offerings.  

Look for competitive interest rates, fees, and additional features that suit your needs.  

When comparing offset mortgages also compare the savings you could make on the interest repayments by offsetting vs the interest you could get on your savings if you held them in another high-interest savings account.  

Check eligibility requirements 

Ensure you meet the eligibility requirements for the specific offset mortgage product you're interested in, which may be more complex than a standard mortgage.  

Requirements may include a minimum deposit, a minimum savings balance, or a minimum income level. 

Gather necessary documentation 

Prepare all the documentation the lender requires, such as proof of income, bank statements, identification, and information about your current debts, assets and savings. 

Consult a mortgage advisor 

It's highly recommended to consult a mortgage advisor or broker who can guide you through the application process and help you find the best offset mortgage deal.  

They can also provide tailored advice based on your financial situation and whether an offset is really the best option for you. 

Submit your application 

Once you've chosen a suitable lender and mortgage product, complete and submit your mortgage application.  

The lender will assess your application, perform a credit check, and, if approved, provide you with a mortgage offer. 

Complete the legal process 

Work with a solicitor or conveyancer to handle the legal aspects of the mortgage and property transaction.  

They will ensure all necessary paperwork is completed and submitted and liaise with the lender on your behalf. 

Finalise the mortgage 

Once all legal requirements are met, the lender will release the mortgage funds, and you can complete the property transaction.  

You'll then begin making monthly mortgage payments based on the agreed terms of your offset mortgage. 

Offset Mortgage FAQs 

Can I access my savings linked to an offset mortgage? 

Yes, you can typically access your savings linked to an offset mortgage.

However, keep in mind that withdrawing money from your savings will reduce the amount offset against your mortgage balance, which may result in higher interest payments. 

Can I link multiple savings accounts to my offset mortgage? 

Most lenders allow you to link multiple savings accounts to your offset mortgage.

This can be beneficial if you have different savings accounts for different purposes, as the combined balances can help reduce your mortgage interest payments. 

Do I need a large amount of savings to benefit from an offset mortgage? 

While having a substantial amount of savings can maximise the benefits of an offset mortgage, even a modest savings balance can still help reduce your interest payments.

The more savings you have, the more you'll potentially save on interest payments over the term of the mortgage.

However, as an offset mortgage can often have a higher interest rate you may be better off with a normal mortgage and investing your savings elsewhere. 

Can I still earn interest on my savings with an offset mortgage? 

With an offset mortgage, you won't earn interest on your savings. Instead, your savings are used to reduce the interest you pay on your mortgage.

This can be more advantageous than earning interest on your savings, especially for higher-rate taxpayers. 

Are offset mortgages only available for residential mortgages? 

While offset mortgages are primarily designed for residential mortgages, some lenders may offer offset mortgages for buy-to-let properties.

It's essential to research and consult a mortgage advisor to determine if an offset mortgage is available and suitable for your specific property investment. 

Can I switch to an offset mortgage if I already have a traditional mortgage? 

Yes, you can usually switch to an offset mortgage if you already have a traditional mortgage. However, you may need to pay fees, such as early repayment charges, for switching your mortgage product.

It's essential to weigh the potential benefits of switching against any associated costs and consult a mortgage advisor to determine if it's the right decision for you.