Offset mortgage
What is an offset mortgage? Find out how an offset mortgage works, whether it's right for you and how to find the best offset mortgage rates.
What is an offset mortgage?
An offset mortgage links your savings account to your mortgage.
It means lenders will treat any savings you have like mortgage overpayments.
You’ll still be able to dip into the savings you’ve chosen to offset. 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?
With an offset mortgage 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 as it lowers 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 by:
paying lower monthly payments (payment reduction)
shortening the length of your mortgage term (term reduction)
So 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 stay the same.
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.
So if 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.
You'll also pay less interest as you'll pay your mortgage off quicker.
How much money can you save with an offset mortgage?
How much you can save with an offset mortgage depends on how:
much of your savings you offset
long you leave your savings untouched for
You'll need to leave a lot untouched in a linked savings account for a long time to make the most of an offset mortgage.
You’ll save even more if you keep adding to your savings.
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.
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 £200,000 mortgage you’d pay off your home loan 2 months early. You'd also 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.
The savings are more impressive if you have a much higher savings balance.
If the savings balance was £20,000 (not £5,000), you could pay off your mortgage 9 months early. This'll save you £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 lets your family put savings into an offset account linked to your 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 access to your savings
you do not have to offset your own money if you choose a family offset mortgage
offsetting even a small amount can make a difference to your mortgage
you can add money to your savings each month and increase the offset amount
it can be more tax efficient
you could save more on interest payments than your savings would earn in a savings account
Cons of an offset mortgage
The downside to an offset mortgage is that:
you will not earn interest on your savings while you're using them to offset your mortgage
you could get higher returns by investing your money in the stock market over the long term. Although stock market returns are not guaranteed
mortgage rates tend to be higher than the cheapest mortgage deals available. These might only be worth paying if you have a decent amount of savings
not all lenders offer offset mortgages so it could limit your choice
some come with a lower maximum loan to value, 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:
Barclays
HSBC
First Direct
Santander
Natwest
Halifax
Lots of smaller lenders and building societies offer this type of mortgage too.
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