What is an offset mortgage?

Would you like to save thousands of pounds in interest payments? Do you want to pay off your mortgage faster? Would you like to link your mortgage debt to your savings account and cut down on your tax payments?

If so, an offset mortgage might be the right mortgage for you.

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How do I save money with an offset mortgage?

With an offset mortgage the idea is that you reduce the amount of interest you pay on your mortgage based on how much you have in your savings account. The amount you have in your accounts is deducted from your mortgage debt so that there is less money to pay interest on. As a basic example, if you have a £200,000 mortgage but you have £50,000 in savings, you only have to pay interest on £150,000.

So each pound you have in your savings account is a pound of debt you don't have to pay interest on. Therefore, the more you have in your savings and/or current account, the more you save over the course of your mortgage. This is especially true when interest rates are on the rise. Plus, interest rates are calculated daily with an offset mortgage so that you save as much money as possible.

The online banking (and offset mortgage) provider Intelligent Finance estimates that an average offset mortgage borrower could knock 5+ years and £80,000 off their mortgage.

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How do I save on tax money with an offset mortgage?

The money in your bank account won't earn you any interest if you offset it against your mortgage debt. Interest on savings is usually taxable – but since you aren't making any interest on your savings, you won't be paying tax. Instead, you pay less interest towards your loan.

This element of an offset mortgage is ideal for higher-rate taxpayers, who usually see 40% of their earned interest eaten up by taxes.

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Can I offset anything else besides my savings account?

Yes. Some offset mortgages will also allow you to offset your current account so that you have more money working for you to save on interest payments. Occasionally, lenders will also let you offset a personal loan and/or credit card debts, which are then charged at the same rate as your mortgage.

If you want to combine all your earnings and mortgage debt into one pot, for maximum potential interest savings, you may also want to consider a current account mortgage.

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Are there other bonuses in getting a flexible offset mortgage?

Yes. Offset mortgages are considered the ultimate flexible mortgage because of the following features, which are usually standard:

• You can make unlimited overpayments without having to inform your lender.
• You can borrow back money or take a payment holiday if you've overpaid enough times.
• Some lenders allow you to make underpayments.
• The money in your account is immediately accessible in case of emergencies.

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How much should I have in savings in order to benefit from an offset mortgage?

You should have 10% to 25% of your total mortgage debt in your savings account in order to start reaping the benefits of an offset mortgage. Otherwise, a high-interest savings account and a standard mortgage might offer a better deal.

Offset mortgages used to only benefit people with large savings. But as time goes by, offset mortgages are benefitting a larger population since the offset mortgage rates are becoming more comparable with the rates of standard mortgages. Typically, fixed rate offset mortgages are set at a high rate, but you can get lower rates with offset tracker mortgages.

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Are there drawbacks to getting an offset mortgage?

Keep 4 factors in mind before getting an offset mortgage:

1. Offset mortgage rates tend to be higher than standard mortgages.
2. Some lenders charge the redraw rate at their standard variable rate instead of the initial deal rate.
3. Some lenders offer interest rates for the savings account that differ from the mortgage, so you might have to pay some interest on your savings.
4. You may have to pay early repayment charges.

Remember that even though offset mortgages come at a higher rate, they offer you a great amount of flexibility. Decide whether competitive rates or flexible payments matter more to you.

You should speak with a professional mortgage adviser to determine whether your situation is right to benefit from an offset mortgage. Because different lenders have so many different terms and conditions for their different deals, talking to an expert can be the most time-efficient way of getting the best offset mortgage rate, not least because you can compare offset mortgages from various lenders.

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Who is the ideal candidate for an offset mortgage?

People with larger amounts in their savings will always benefit the most from offset mortgages. However, you can still benefit if you don't have a large savings account.

Higher-rate taxpayers and self-employed workers who save up money year-long for tax purposes are especially suitable for offset mortgages. Both will benefit from paying less interest on their mortgage while not losing any money towards taxes.

Remember, if you take out an offset mortgage you need to keep a close eye on your finances. It is your responsibility to constantly check your accounts and keep track of your debt.

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How to get an offset mortgage in the UK

Our short enquiry form will put you in touch with an unbiased mortgage adviser, who will call you back to answer all of your questions, give you offset mortgage advice, and get you on your way to buying your home.