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Offset Mortgages

All you need to know about an offset mortgage

  • An offset mortgage links your savings to the amount you owe on your mortgage, which could reduce how much interest you pay.

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Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

What is an offset mortgage?

There are several different types of mortgages available to UK homeowners. One option that is growing in popularity is the offset mortgage.

An offset mortgage links your mortgage to your savings account. The value of your savings is deducted from your mortgage balance, so you pay interest on the balance. This lowers your monthly payments. Generally, the higher the amount of money you have in your savings account, the less interest you will have to pay on your offset mortgage.

That said, with an offset mortgage, you will not earn interest on your savings. But because people usually pay more interest on a mortgage than they earn from a savings account, an offset mortgage could still save you money in the long term. So, it’s effectively a way of getting your savings balance to work harder for you.

But how does an offset mortgage work, exactly?

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How do offset mortgages work?

An offset mortgage doesn’t affect the value of your savings. Instead, they’re placed in an offset savings account with your mortgage provider. Then, their value is used to ‘offset’ against your mortgage.

This means if you have £40,000 in savings and a mortgage worth £300,000, you’ll only pay interest on the remaining £260,000 of your home loan.

On a mortgage interest rate of 2%, this reduces your annual interest payments from £6,000 to £5,200. That will leave you with a saving of £800.

However, because you’re no longer making interest on your savings, you’ll need to factor this into the total amount saved. So, if you were earning 0.5% interest on that £40,000 (e.g. £200 a year), the total amount saved on your mortgage would be £600.

What types of offset mortgages are available?

As with a standard mortgage, you can choose from a range of options with an offset loan. These include:

  • Fixed-rate offset mortgage: The interest rate you pay on the mortgage after it has been offset by your savings is fixed for a set term. This is often two, three, or five years

  • Tracker offset mortgage: The interest rate you pay on the mortgage after it has been offset by your savings is variable and follows the Bank of England’s base rate

  • Discount offset mortgage: The interest rate you pay on the mortgage after it has been offset by your savings is given a set discount on the lender’s standard variable rate (SVR)

  • Interest-only offset mortgage: You only pay off the interest on the mortgage and need another way of repaying the capital. The interest owed will depend on how much of your mortgage is offset by saving

  • Family offset mortgage: Parents can put savings in an offset account linked to their child’s mortgage. This reduces the child's interest payments, potentially making it easier for them to pass the lender's affordability checks

What are the advantages of an offset mortgage?

Offset mortgages come with an array of benefits. If you’re thinking about taking out an offset mortgage, here are some of the advantages you may want to consider:

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    Greater monthly savings

    An offset mortgage can save you more in interest repayments than you’d usually earn on a savings account. So, you’re making bigger savings each month

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    More flexibility

    In most cases, you can still access your savings if you need them, making your finances more flexible. That said, make sure to check individual terms and conditions of offset-mortgage deals first

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    Help getting on the property ladder

    It can be a good way to help a family member get on the property ladder, as some lenders will allow you to offset your savings against someone else’s mortgage (i.e. a child or grandchild) who may be a first-time buyer

What are the disadvantages of an offset mortgage?

As with most mortgages, offset deals have their own share of drawbacks too. So, when deciding which option is the best for your needs, you may want to take into account the following factors:

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    Higher interest rates

    Offset mortgages tend to have slightly higher interest rates than the market-leading fixed or tracker deals. This is because you’re paying a premium for the flexible and offset features

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    Can't earn interest on savings

    You won’t earn interest on your savings in the offset account

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    Might be better to use cash savings

    It could be preferable to use your cash savings to pay off part of your mortgage and reduce your loan to value (LTV). This is likely to give you access to lower mortgage rates, meaning you’ll pay less interest overall

What is the difference between a fixed and standard variable-rate offset mortgage?

As with regular mortgages, you can get both fixed and standard variable interest-rate offset mortgages.

Fixed-rate deals usually offer lower interest rates than standard variable rate (SVR) mortgages. What’s more, they often last for two, three, or five years before moving you onto the lender’s SVR.

One of the only advantages of being on the lender’s SVR is that you aren’t locked into a mortgage deal. In this case, you’re free to sign up for a better rate at any time or pay off the mortgage entirely without an early repayment charge (ERC).

Compare mortgages with MoneySuperMarket

While MoneySuperMarket does not currently offer offset mortgages, you can compare other types of mortgages with us. All you need to do is enter some details, such as how much you need to borrow, for how long, and the value of your property.

You can compare mortgages by their initial interest rate and the term of the deal. This includes whether the rate is fixed or variable and whether there are any product fees included.

Our comparison tool won’t take into account your financial situation or your credit history. So, your monthly repayments and deal rates could change when you go to a lender to apply for a mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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You can still withdraw money from your savings account with an offset mortgage. However, taking money out of your savings will reduce the amount you can offset against your mortgage debt. Therefore, your monthly mortgage payments will go up.

You may also need to keep a minimum balance in your savings account. Find out if there’s a minimum balance requirement before picking an offset mortgage deal, as this could impact on your mortgage decision.

Yes, you should be able to get an offset mortgage to pay for a buy-to-let property. Bear in mind, though, that there are not as many offset deals available to choose from. This means that you’re likely to have to meet more stringent eligibility criteria.

If you’re looking to take out a buy-to-let mortgage, you can find out all you need to know on our page on buy-to-let mortgages.

Yes, generally, you should still be able to access your savings and withdraw the money you require from your account. But in this scenario, it’s worth noting that this will have repercussions on your monthly repayments, as your instalments are likely to increase.

Additionally, lenders may have specific rules when it comes to withdrawing money from your offset savings account. For example, some mortgage providers will expect you to give notice. So, it’s always wise to check the small print to know exactly what your lender’s terms and conditions are.

Technically, you can. There is often no limit to what you can offset, meaning that you can pay as much as you like in your savings account. If your offset savings account is 100% of your mortgage, then you won’t be charged any interest at all.

The same will happen if your savings are higher than your mortgage. But in this case, it may be worth opening separate savings account for the extra sum. This is because you’ll get no benefit from the additional amount in the offset savings account.

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