What is an offset mortgage?

An offset mortgage links your savings account to your mortgage. 

It means that any savings you have will be treated like overpayments on your mortgage

You’ll still be able to dip into the savings you’ve chosen to offset. But this’ll affect the interest you pay.

You’ll need to have your savings and mortgage with the same provider.

Some offset mortgages also offset the balance in your current account, but this is less common.

Like a traditional mortgage, an offset mortgage will either be a fixed or variable rate.

An offset mortgage is sometimes known as a:

  • flexible mortgage

  • flexible offset mortgage

How does an offset mortgage work?

An offset mortgage means you pay interest on your mortgage balance minus your savings balance.

For example, if you had a mortgage of £200,000 and offset £50,000 in savings, you’d only pay interest on £150,000.

When you add to or take out some of your savings money, your monthly repayments will change.

So if you had a mortgage of £200,000, offset £50,000, but took £10,000 out of those savings then you’d pay interest on £160,000.

Why get an offset mortgage?

An offset mortgage can save you money because it reduces the total interest you’ll pay on your mortgage.

Over a full mortgage term of 20 to 25 years, an offset mortgage could save you thousands of pounds in interest.

You can use an offset mortgage in one of two ways:

  • by paying lower monthly payments (payment reduction)

  • by shortening the length of your mortgage term (term reduction)

Payment reduction

Let’s take the above example further.

If you had a mortgage of £200,000 and were paying an interest rate of 2% over a 20 year mortgage term, you’d pay £1,012 a month.

But if you offset £50,000 in savings you’d only pay interest on £150,000. 

Your monthly mortgage payment would then fall to £759.

Paying a lower monthly payment will free up your money to spend on other things. 

It’ll also lower your overall mortgage interest payments. 

Your mortgage term will remain the same.

Term reduction

The other option is to keep your monthly payments the same as they would be without offsetting. 

This way you’ll be overpaying on your mortgage.

In the above example where you offset £50,000, you’d be overpaying by £253 a month.

This means you’ll reduce your mortgage term and become mortgage free faster. 

As you’ll have paid off your mortgage quicker, you’ll also pay less interest.

How much money can you save with an offset mortgage?

How much money you can save with an offset mortgage depends on:

  • how much of your savings you offset

  • how long you leave your savings untouched for

You'll need to leave a large amount of cash untouched in a linked savings account for a long period of time to really make the most of an offset mortgage. 

You’ll save even more if you add to your savings as you go. 

For example, you might add to your savings each month or every time you get paid.

An offset mortgage calculator can show you how much money you can save.

An example with a savings balance of £5,000

Let’s say you had a £200,000 mortgage to pay over 20 years with a 2% interest rate. 

You also have £5,000 in savings. 

If you took out an offset mortgage and put the £5,000 in a linked savings account, you’d pay interest on £195,000.

According to Barclays’ offset mortgage calculator, if you kept your monthly repayments the same as they would be on a mortgage of £200,000, you’d pay off your home loan two months early and save £454 in mortgage interest.¹ 

You’d also still have the lump sum of £5,000.

If you kept your mortgage term the same and chose to make lower monthly repayments, you’d reduce your mortgage payment by £8.26 a month. 

This would reduce the total amount of interest you pay on your mortgage by £1,983. 

You’d also still have the lump sum of £5,000.

An example with a savings balance of £20,000

The savings are a lot more impressive if you have a significantly higher savings balance.

If the savings balance was £20,000 (not £5,000) in the above example, you could pay off your mortgage nine months early and save £1,755 in mortgage interest.

If you kept your mortgage term the same and made lower monthly repayments, you’d reduce your mortgage payment by £32.01 a month. 

This would reduce the total amount of interest you pay on your mortgage by £7,683.

Family offset mortgages

A family offset mortgage enables parents or other family members to put savings into an offset account linked to a child’s mortgage. 

This can make it easier and cheaper for the child to be accepted for a mortgage.

Is an offset mortgage worth it?

There are both benefits and drawbacks to getting an offset mortgage.

Pros of an offset mortgage

  • With an offset mortgage you still get access to your savings

  • You don’t necessarily need to offset your own money if you choose a family offset mortgage

  • Offsetting even a small amount will make a difference to your mortgage 

  • You can add money to your savings each month and increase the offset amount

  • Offset mortgages can be tax efficient

  • You could save more on interest payments than your savings would earn in a regular savings account

Cons of an offset mortgage

  • Your savings won’t be earning any interest while being used to offset your mortgage

  • You could generate higher returns by investing your money in the stock market over the long term (although stock market returns are not guaranteed)

  • Offset mortgage rates tend to be higher than the cheapest mortgage deals available. These higher rates might only be worth paying if you have a decent amount of savings

  • Not all lenders offer offset mortgages so your choice may be limited

  • Some offset mortgages come with a lower maximum loan to value requirement, so you may need a larger deposit

How to get the best offset mortgage rates

You should shop around to find the best offset mortgage rate. 

This means comparing the interest rates and fees offered by different mortgage lenders on offset products.

A mortgage broker can help you compare offset mortgage deals.

Lenders that usually offer offset mortgages include:

Lots of smaller lenders and building societies offer this type of mortgage too.

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Your home could be repossessed if you don't keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

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Sources

¹ Barclays offset mortgage calculator