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Offset mortgages explained

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Offset mortgages explained

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Last reviewed on 15th August 2023 by Martin Alexander (Mortgage Advisor)

An offset mortgage could be something to consider if you have adequate savings in the bank. You may be able to reduce the length of your mortgage term and pay off your mortgage sooner than planned. That being said, offset mortgages aren’t as readily available when compared to regular mortgages. This is because a lot of lenders don’t offer them, so your options will be limited.

Find out if you’re able to save money on your mortgage by making an enquiry. Our experts will then call you back to calculate your options.

What is an offset mortgage?

An offset mortgage allows you to link your mortgage to your savings account, so you can offset the amount of interest you owe on your mortgage. This can be a great way to reduce the overall cost of your mortgage. That said, you won’t earn interest on your savings as a result.

Rather than paying interest on your entire mortgage balance, you’ll be able to pay interest on your balance minus your savings. Because you’re paying interest on a lower amount, you’ll save money on your monthly payments. This doesn’t mean to say that your savings will be used to pay your mortgage. Your savings simply stay at the value they are and are used to calculate the amount you’re able to offset.

It’s also possible to get an offset mortgage on a buy to let. Although there aren’t many lenders offering them, they can be a great way for landlords to reduce costs.

How do offset mortgages work?

Offset mortgages work differently from traditional methods of borrowing, such as repayment mortgages. With a repayment mortgage, you’d typically repay the capital and interest each month, until it’s repaid in full. With an offset mortgage, your savings are set against your outstanding mortgage balance in order to pay less interest.

How can I pay less interest with an offset mortgage?

An offset mortgage can be used to reduce your mortgage term in addition to reducing your payments. You may be comfortable paying your mortgage and have no desire to reduce your monthly payments. In this case, reducing your mortgage term instead will give you the opportunity to pay off your mortgage much sooner.

Take a look at this example:

Imagine your mortgage balance is £150,000 and you have £50,000 in a savings account. Rather than paying interest on the £150,000 that you owe, you’d just pay interest on £100,000, as you have £50,000 in your savings account.

This can reduce the amount you pay each month, by using your savings in an effective way.

What are the pros and cons of offset mortgages?

While an offset mortgage can seem attractive, you’d still need to consider the disadvantages involved.

Pros

  • Pay your mortgage off early – You can use the savings you make on paying less interest towards paying off your mortgage early. This can be a lot cheaper than a repayment mortgage when compared across the overall term.
  • Save money on tax – If your savings are held in an offset account, you can benefit from the return that is offset against your mortgage without paying tax.
  • Get more from your savings – If the interest rate of your savings account is less than your mortgage interest rate, you could put your savings to better use with an offset mortgage.

Cons

  • Higher interest rates – When compared to repayment mortgages, interest rates tend to be higher but it still may be possible to save money overall.
  • Only recommended with adequate savings – Spending money that’s in your offset account may result in your mortgage becoming expensive. This is because you’ll have less capital to offset. An offset mortgage is only advised if you’re able to leave your savings untouched for a large majority of your mortgage term.
  • Unable to access your savings – Some lenders will also have a cap on what can be withdrawn from your savings. As a result, you may not be able to access your savings when needed which can cause financial problems. Check with your lender beforehand if your mortgage deal has a minimum savings balance that’s required.
  • Less choice – When compared to repayment mortgages, there are a lot fewer lenders that offer offset mortgages. As a result, you could find yourself with little choice. Furthermore, when lenders have less competition, mortgage rates tend to be slightly higher.

ask a mortgage broker

Offset mortgage rates

It’s not uncommon for offset mortgage rates to be slightly higher than regular mortgage rates. After all, you’ll be using your savings to minimise your balance, so a slightly higher rate can be justified. Furthermore, you’re still likely to save money on your mortgage each month.

Even if you don’t have a lot of savings, a small amount can still bring your monthly payments down. A small saving each month can accumulate to a large saving when calculating the overall cost of your mortgage.

Many offset mortgage lenders allow borrowers to add to their savings accounts or withdraw funds when needed. If you withdraw funds, your mortgage payments will increase. In comparison, adding funds to your savings account will reduce your payments further. This is because you’re able to offset more of your mortgage with a larger amount of savings.

Some mortgage deals may allow you to make overpayments. That being said, it’s often more viable to add additional funds to your savings account. Although an overpayment will bring your mortgage balance down, additional savings will also have the same effect. The only difference is that you’d still be able to access your savings. Once you make an overpayment, the funds are irretrievable unless you remortgage and release equity.

You can view current offset mortgage rates here.

Calculating how to save the most on your mortgage

Whether you choose an offset or a regular mortgage, it’s definitely worth calculating the costs involved before making a decision. With extremely low-interest rates, savings aren’t likely to be giving you the benefit they potentially could.

An advantage of having an offset mortgage is that you’d potentially save more interest on your mortgage than you’d gain in a savings account. Furthermore, you may be liable to pay tax on any interest you make from your savings. In comparison, you’d pay no tax by offsetting your mortgage against your savings.

On the other hand, earning zero interest on your savings can be seen as a disadvantage. This is why it’s important to calculate which deals will save you the most money each month.

Offsetting your mortgage can allow you to use your savings as security for a mortgage deposit for a child or family member. This can be great for when you don’t want to gift a mortgage deposit but would consider being a guarantor instead. Once part of the mortgage is repaid, lenders typically allow guarantors to access their savings as they no longer need security for the loan.

How mortgage advisors can help

We understand that calculating and comparing mortgages can be difficult. This is especially true when trying to compare hundreds of lenders each with their own mortgage products. Furthermore, trying to assess whether an offset mortgage would save you more money than a regular mortgage isn’t an easy task.

Mortgage advisors can calculate each deal with the lenders you’re eligible with. We’ll also compare whether an offset mortgage would be better suited than a regular deal. In doing so, you’re able to calculate which deal will save you the most each month.

You’ll also have to consider the costs and fees involved with certain mortgages. Although you may think a lower mortgage rate will save you more money, fees can have an impact on the overall cost of your mortgage. This is why speaking to an advisor can be so beneficial.

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About the author

Martin Alexander
Senior Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.