What is an offset mortgage and is it for me?

What are the benefits of an offset mortgage?

Automatically search over 1,800 mortgages.

An offset mortgage can help you to save money on your mortgage by enabling you to either shorten the term so that you become mortgage-free sooner than you would normally be, or by reducing the amount needed for your monthly repayments. We take a look at how they could save you thousands of pounds.

How does an offset mortgage work?

When you take out an offset mortgage the lender enables you to link your savings account (and in some cases your current account) to your mortgage. Your savings are ‘offset’ against the value of your mortgage, so you will only pay interest on your mortgage balance minus your savings balance.

Your savings are not actually used to repay any of your mortgage, they are just linked to it to save you interest.

For example, let’s say you have a mortgage of £250,000 linked to a savings account that has a balance of £20,000. In this case you would only pay interest on £230,000, not £250,000. Over the term of the loan, this could save you thousands of pounds in mortgage interest payments.

It can save you money in one of two ways as you could choose to either:

  1. Use the saving on interest to reduce the monthly payment amount you will be asked to pay each month

Or:

  1. Pay off your mortgage sooner by offsetting your savings against the balance of your mortgage, which will cut down the amount of interest you would otherwise be charged

What are the pros and cons of an offset mortgage?

Offset mortgages offer a lot of advantages and they have few drawbacks to them:

  • The chances are that you will save more interest than you would earn from a savings account
  • There is no tax to pay on the mortgage interest you save, but you would have to pay tax on the interest you would have earned from cash in a savings account (although savings in a cash ISA are not taxed). This makes this type of mortgage particularly attractive for higher rate taxpayers
  • You would still have access to your savings, but if you made a withdrawal, your mortgage payment may go up
  • You would have a choice of either finishing your mortgage sooner, or making lower monthly mortgage repayments

However, your savings would no longer earn interest. This means that their value would probably not keep pace with inflation as your savings would lose their spending power and not be able to grow because they would not earn interest.

Are offset mortgages flexible?

They offer a highly flexible way of purchasing a home. You are able to withdraw your money from the savings account if you needed to without giving notice. On the other hand, if you wanted to, you could put as much money as you could afford into the savings account until the amount in it (the balance) was the same as what you owed on your mortgage, then you could ask to pay off the mortgage in full.

If needed, you could even choose to take payment holidays on your mortgage or underpay on it if you had added enough money to your savings account.

Is an offset mortgage right for me? 

This will depend entirely on your personal circumstances. If you happen to have a decent amount of savings, an offset mortgage may well be suitable for you. But if you do not have a lot of money put by, this may not be the mortgage for you.

Should I switch from a standard mortgage to an offset mortgage?

You would need to compare the interest rate that you are paying with your current mortgage deal with the rate you would be paying with an offset mortgage. Feel free to ask one of our brokers how much you could save in interest. It is worth asking Loan.co.uk for help in working this out, as the amount of interest that you will save will be heavily influenced by the amount of money that you are able to put into your linked savings account.

You would also need to find out if you would have to pay an early repayment charge to your current lender for ending your mortgage earlier than originally scheduled, as depending on how long you have had the mortgage, the penalty could be substantial.

If you are considering an offset mortgage, it is particularly worth talking through your options with a mortgage broker as this type of loan is more complicated than standard mortgages, the different lenders have different lending criteria, and it does take some tedious calculations to see the size of the saving you could potentially make.

Related articles

Chancellor holding the Budget Box before revealing help for borrowers and the housing market

Types of loan explained – Ultimate loans guide

Loans can come in many forms and names, from mortgages to secured to bridging loans, how do you know which is the one you need? Read our guide to find out.

Hoe to manage money better

What should I do to manage my money better?

Are your finances a mess? Don’t panic. Take a look at how you can plan, budget and manage your money better, including ways you can cut down those monthly bills.

a father doing paperwork and talking to his child

Should I remortgage with the same lender or switch?

You do not have to move home to take advantage of a more competitive mortgage. But why it might be a good idea to move your mortgage to another lender, and when it may be better to stick with your current lender?

Man in study understand financial jargon

Financial Dictionary – Understand Financial Jargon

We hate jargon. We try very hard not to use jargon but sometimes there’s no alternative. So, to make absolutely sure we’re…

consolidate debts

What should I consider when looking for secured loan?

A secured loan is provided by a lender, with the borrower using their home as collateral. Here are eight things you should think about before looking for a secured loan.

finance_loan_remortgage_bridging

How can I finance a house extension?

Do you urgently need extra room but lack the funds to carry out the work? You have many options depending on your circumstances.

the pros and cons of 95% mortgages

The pros and cons of a 95% mortgage

A 95% mortgage allows you to borrow up to 95% of the total cost of your property, so you could buy your dream home with a deposit of at least 5%. With a 95% mortgage you only need to get..

mortgaging a property, financial circumstances

What are my mortgage options if my circumstances change?

No-one can foresee what will happen in the future, but you do not need a crystal ball to see that a change in your financial circumstances may affect your ability to make repayments on your mortgage.

Building new frame energy-efficient house, housing

Help with solving the UK’s housing crisis with modular homes and developmental loans

Theresa May has said on more than one occasion that “Britain’s housing market is broken and in need of fixing.” Could modular housing boost the housing supply?

homebuyer schemes, purchase_house_first-time

Schemes for first-time homebuyers and existing homeowners

The government is attempting to make it easier for you to buy your first property. We take a look at the schemes they have put in place.

Categories

Homeowner
Loans

Mortgages

Remortgages

Credit
Help

In the
News

Automatically search over 1,800 mortgages.

Share This