Offset Mortgages – What is it, How Does it Work and Why is it Beneficial?

What is an offset mortgage?

An offset mortgage is a type of product that lets you link your mortgage to your savings. The balance of your savings is used to reduce the amount of interest charged on your mortgage. Your savings will be “offset” against the value of your mortgage and you’ll only pay interest on your mortgage balance minus your savings balance. Your savings don’t repay any of your mortgage, they just sit alongside it and saves you interest. You can also link an offset mortgage to your current account.

How does it work?         

*It works something like this:
You have a mortgage of £100,000. You’re paying an interest rate of 3.00%.
You also have £10,000 in a savings account. By offsetting your £10,000 savings, you only pay interest on £90,000 of your mortgage.
Over the course of the year this can save you up to £300, but this is dependent on the interest rate on your savings account.

Interest rate dependent. This is correct of 12/06/2017

With an offset mortgage, you can choose how to benefit from the interest you save:

  • Lower monthly payments – Your mortgage term remains the same but you pay back less each month
  • A shorter term – Keep your payments the same and you could shorten the term of your mortgage

Once your savings or current account are offset against your mortgage, you can still add to them – this is good as more money offset means more interest saved.
The pros:

  • Depending on the current interest rates, you could potentially save more interest than you could earn in a savings account.
  • Pay no tax on the interest you save – you may have to pay tax on interest earned on a normal savings account (apart from cash ISA’s).
  • Keep easy access to your savings (remember the mortgage payment may go up if you make a withdrawal from your savings).
  • Finish your mortgage sooner or make lower monthly payments.
  • Help a child or relative get on the property ladder – Some offset mortgages allow family members to offset their savings against a relative’s mortgage.

The cons:

  • Your savings don’t earn interest. So if you rely on your savings for income, offsetting against someone else’s mortgage is not a good idea.
  • Your savings will lose their spending power, as they won’t grow.

Is an offset mortgage a good idea?

Offset Mortgages are a popular option for higher rate taxpayers in particular. This is because you don’t earn interest on your savings, therefore you won’t be paying out for tax.
With an offset mortgage, you usually still have access to your money whenever you need it, your savings aren’t locked away, but you have to be wary of the fact that your mortgage payment may increase if you make a withdrawal.

Is an offset mortgage a bad idea?

Although the deals can look tempting, the rates charged are can potentially be higher than those on a ‘traditional’ mortgage.

Again, you must remember that when you offset your savings against a mortgage, there will be no interest made on the money.

Ultimately, it is important to compare a wide range of different mortgages and rates. Don’t forget to factor all the other fees that come with a mortgage! If you’re unsure, it might be beneficial to speak to a mortgage broker who can help you find the best deal.

Here at Active Brokers, we actively search for the best deal for you and make sure that you feel confident in your mortgage. We can help you to prepare for a mortgage application 12 to 24 months before you choose to buy a home. To book a free strategy call, click here.

  • This does not constitute advice, it is for information purposes only.
  • You should contact a mortgage broker for personalised advice for your specific circumstances.  Please ask us for a personalised illustration.
  • A fee of up to 2% of the mortgage amount is payable. The precise amount will depend on your circumstances. A typical example would be £995.00 payable on application and the remainder payable on mortgage offer. We will also be paid commission from the lender.
  • Active Brokers Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (// under reference 488342.
  • Your home may be repossessed if you do not keep up repayments on your mortgage

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