What are offset mortgages?

While most homeowners are familiar with fixed rate and tracker rate mortgages, fewer borrowers are aware of how an offset mortgage deal works, or the benefits and value they can offer.

What is an offset mortgage?

With an offset mortgage you can use savings in a linked bank account to offset the mortgage debt on which you pay interest.

For example, if you have a £250,000 mortgage, and also a savings account with the same bank that contains £25,000, you will only pay interest on £225,000 of your mortgage instead of the full £250,000.

As with other mortgage deals, offset mortgages are offered at fixed, variable or tracker rates of interest. An offset deal can be either on a capital repayment or interest-only basis.

What benefits can I expect with an offset mortgage?

Having an offset mortgage can provide many flexible benefits:

• Offset mortgages can be a tax-efficient way to use your savings. You won’t pay any tax on savings income, or use up your personal savings allowance, because you won’t be earning interest on your cash – although the savings still generate a return for you by bringing down your mortgage interest payments. It can be an efficient use of cash savings for higher and additional rate taxpayers.
• By offsetting a lump sum against your mortgage and making regular deposits into the account, you can save a significant sum in mortgage interest charges throughout the course of the mortgage.
• If you continue monthly repayments for the full mortgage loan (regardless of the offsetting), the debt balance will reduce more quickly, and you will pay off your mortgage earlier. Or you could instead choose to make smaller monthly payments on your mortgage for the originally agreed term: these would vary depending on the scale of your savings and how much they reduce the interest owed.
• You have access to your savings as usual, so you can withdraw money at any time (in which case your mortgage interest payments will rise) or you can add to your savings (further reducing the interest on your mortgage loan).
• Many lenders offering this kind of product will allow you to link your  savings with your child’s mortgage. Placing your savings into the savings account linked to your child’s mortgage means that they will pay less in interest – making this a very efficient way for the Bank of Mum and Dad to help get their children onto the property ladder.

Is an offset mortgage a good idea?

Offset mortgages are not right for everyone. This will depend on your situation, the value of your savings, and how you’d like to pay off your mortgage.

Is it better to put down a bigger deposit or offset?

Putting down a bigger deposit may mean you get offered better mortgage rates by lenders. You’ll also have a smaller mortgage loan so the interest charge will be lower. However, using an offset mortgage with flexible savings would mean that you would have access to the cash if you needed it.

Is it worth making overpayments?

Many lenders will let you overpay a certain amount each year on your offset mortgage (though early repayment charges may apply), reducing the amount of principal owed, and therefore reducing interest payments too. Once you’ve made an overpayment into your offset mortgage account, however, you won’t be able to access it again – so if you might need the money in future, putting it in an offset savings account may be better.

Is an offset mortgage right for you?

Offset mortgages have key advantages for some groups, for example the self-employed and others with substantial savings but variable monthly income and outgoings. It can also be tax efficient for higher and additional rate taxpayers.

The flexibility offered by an offset mortgage can also be attractive to those looking to clear their mortgage at a faster rate than the traditional 25-year term.

But offsetting is not for everyone. The mortgage rates offered on offset deals tend to be slightly higher than those on the best fixed rate and tracker rate deals. So you’ll only want to pay a premium for the flexibility offered by an offset deal if you can make the most of it.

It is important to carefully consider if an offset mortgage is right for you, especially if you have only modest savings.  

Seek expert advice from an adviser who can discuss how offset mortgages work and decide the best option for you.

The home on which the mortgage is secured may be repossessed if repayments are not kept up to date on the mortgage.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.