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YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. The FCA does not regulate buy-to-let mortgages for commercial and investment properties.
Author
Atousa Cunnell
Editor
James Andrews
Last updated
November 7th, 2023
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What is an offset mortgage?

An offset mortgage lets you use your savings to reduce the amount of interest you pay on your mortgage. How much you save depends on what you owe, your mortgage interest rate and how much you have in savings.

With a standard savings account you earn interest on your savings balance, but an offset savings account uses your balance to reduce the interest you owe on your mortgage instead. 

You might find that your money works harder in an offset savings account, as the interest earned on savings may be lower than the interest paid out on a mortgage.

However, it's always worth doing some research to check whether you can find a savings account that pays out more in interest than you'll save with an offset mortgage to decide what the best option for you is.

How do offset mortgages work?

With an offset mortgage, your repayments still go towards paying off both a chunk of the capital (what you borrowed) and some interest each month, but the amount of interest you owe is reduced by the value of your savings balance.

For example, if your mortgage is £200,000 and you have savings of £20,000, you'll still owe £200,000, you’ll only pay interest on £180,000 – as long as those savings remain in your offset account. 

Here's how it works:

  • You transfer your savings into an account with the same lender that you have your mortgage with and benefit from the interest reduction whilst it remains in there

  • You have full access to your savings, with the ability to add to or withdraw money as needed

  • For every extra pound you save, you’ll pay interest on one pound less of your mortgage. However, be aware that if you take money out of your savings, the opposite applies

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Are the monthly repayments cheaper with an offset mortgage?

The shorter answer is maybe, as you can choose to either reduce your monthly repayments or reduce the mortgage term.

With most lenders you can choose to carry on making repayments based on the pre-offset interest charged on the full mortgage, which means you’ll be overpaying your mortgage without having to pay more cash each month to do so. This allows you to repay your mortgage quicker but means your monthly repayments will stay the same.

Or for more immediate savings, you can simply repay the interest due on the post-offset amount, making your monthly repayments lower.

Can I still access my savings account during an offset mortgage?

Yes you can normally still access your savings while they're in an offset account. However, bear in mind that if you withdraw a chunk of savings then this will mean you won't benefit as much from a reduction in interest payments.

Individual lenders may also have specific rules on withdrawals from an offset savings account, such as the amount of notice you need to give them. Make sure to check the terms and conditions for your offset mortgage deal.

How much money would I save with an offset mortgage?

How much money you could save with an offset mortgage depends on the mortgage amount, savings amount, and the interest rate and term length on the mortgage.

For example, if you offset savings of £20,000 against a mortgage of £150,000 (with a 5% interest rate and 25 year term), you could save over £80 per month and over £24,000 over the full mortgage term.

However, this calculation is just an illustrative example and is based on the rate remaining the same for the full term, which is unlikely to happen as you'll normally go on to your lender's SVR or remortgage to a new rate after the introductory deal period.

There are lots of aspects to consider when taking out an offset mortgage and how beneficial it is in terms of saving you money. It can be worth speaking to a mortgage broker who can advise you on the best offset mortgage for you.

It's also worth checking if you would be better putting your money into another savings account. You may find that you could get more in interest from a savings account than you'll save with an offset mortgage. Do your research and crunch the numbers to make sure it's the right option for you.

What types of offset mortgages are available?

Fixed-rate offset mortgages

The interest rate you pay after your savings have been offset is fixed for a set period with a fixed-rate mortgage, meaning your mortgage repayments stay exactly the same until that deal comes to an end.

Fixed-rate deals are beneficial if you need to stick to a tight budget as you know how much you need to pay each month during the deal. However, if interest rates fall, you won't benefit from a decrease in payments.

Fixed deals are typically offered for two to five years, but some lenders offer longer fixed-rate term options.

Variable-rate offset mortgages

After your savings are offset, the interest rate you pay is subject to change at any time with a variable-rate mortgage.

If you opt for a tracker mortgage, the rate is based on an external financial indicator, such as the Bank of England base rate. If the indicator goes up, so will your interest rate, but you’ll also pay less if it falls.

If you're on a discounted mortgage, the rate you pay is a set amount below the lender's standard variable rate (SVR). If the SVR rises or falls, so will your mortgage rate.

Interest-only mortgages

You only pay the interest you owe each month with interest-only mortgages – you don’t pay any capital, which is the amount you borrowed. With an offset interest-only mortgage, your savings will also reduce the amount of interest you owe.

At the end of the mortgage term, you'll still owe the full amount you borrowed. For this reason, lenders will want to know you have a robust repayment strategy in place. Otherwise you'll have to sell the property to cover the loan when the mortgage term ends.

Due to them being high-risk, interest-only mortgages are rarely offered for residential properties now. However, buy-to-let mortgages are commonly offered on an interest-only basis.

Family offset mortgages

Family offset mortgages are offered by fewer lenders, but can be helpful for those without savings of their own.

They allow a buyer to use the savings of family members, often parents, to reduce the interest they pay on their mortgage.

Family offset mortgages are one of the few options for 100% mortgages (also known as no-deposit mortgages).

What types of offset mortgages are available?

Fixed-rate offset mortgages

The interest rate you pay after your savings have been offset is fixed for a set period with a fixed-rate mortgage, meaning your mortgage repayments stay exactly the same until that deal comes to an end.

Fixed-rate deals are beneficial if you need to stick to a tight budget as you know how much you need to pay each month during the deal. However, if interest rates fall, you won't benefit from a decrease in payments.

Fixed deals are typically offered for two to five years, but some lenders offer longer fixed-rate term options.

Variable-rate offset mortgages

After your savings are offset, the interest rate you pay is subject to change at any time with a variable-rate mortgage.

If you opt for a tracker mortgage, the rate is based on an external financial indicator, such as the Bank of England base rate. If the indicator goes up, so will your interest rate, but you’ll also pay less if it falls.

If you're on a discounted mortgage, the rate you pay is a set amount below the lender's standard variable rate (SVR). If the SVR rises or falls, so will your mortgage rate.

Interest-only mortgages

You only pay the interest you owe each month with interest-only mortgages – you don’t pay any capital, which is the amount you borrowed. With an offset interest-only mortgage, your savings will also reduce the amount of interest you owe.

At the end of the mortgage term, you'll still owe the full amount you borrowed. For this reason, lenders will want to know you have a robust repayment strategy in place. Otherwise you'll have to sell the property to cover the loan when the mortgage term ends.

Due to them being high-risk, interest-only mortgages are rarely offered for residential properties now. However, buy-to-let mortgages are commonly offered on an interest-only basis.

Family offset mortgages

Family offset mortgages are offered by fewer lenders, but can be helpful for those without savings of their own.

They allow a buyer to use the savings of family members, often parents, to reduce the interest they pay on their mortgage.

Family offset mortgages are one of the few options for 100% mortgages (also known as no-deposit mortgages).

Offset mortgage rates

Offset mortgage rates are typically a bit higher than those on standard repayment  mortgages. However, the reduction in interest will usually more than cancel out the difference. Like most mortgages, the interest rate you’re offered will depend on your credit history, and how much you want to borrow.

The interest rate is your key to making an offset mortgage work for you, so it’s important to make sure that you wouldn’t benefit more from putting your savings into a higher interest standard savings account, or choosing a different type of mortgage deal with a lower interest rate. 

For example, if your savings account pays 0.5% interest on your £20,000 savings balance (£100 a year) you should deduct this from the total saved on your mortgage through offsetting to get a full picture of the benefits.

What are the pros and cons of offset mortgages?

Pros

You pay less interest on your mortgage debt overall, allowing you to either finish repaying your mortgage earlier or make smaller monthly payments
You can still access your savings if you need to
They can be tax efficient for higher rate taxpayers, as you pay no tax on savings in a linked savings account
Some offset mortgages let you link up your current account as well as your savings account or multiple savings accounts

Cons

Offset mortgage rates can be higher than standard repayment mortgages
They are most beneficial to those with a lot of savings, so if your savings are fairly small, this type of mortgage may not offer you the greatest benefits.
Some lenders may expect you to maintain a minimum balance, so you’ll need to factor this into your future financial plans
Fewer lenders offer offset mortgage deals, so you may have less choice
If the best offset mortgage rates are high, it may be better to use your savings to overpay a standard repayment mortgage instead
“Offset mortgages can be a good way to make your savings work harder for you, either by reducing your mortgage term or your monthly repayments. But make sure to check that you won't make more in interest with another savings account than you'll save with an offset mortgage.”
Author image
Atousa Cunnell
Content Producer - Mortgages

Offset mortgages FAQs

Can I have more than one account for an offset mortgage?

Yes, many lenders let you link multiple savings accounts to your offset mortgage and some even offer the option to link family members savings accounts.

Can you offset 100% of your mortgage?

There’s not usually a limit to what you can offset, most lenders let you pay as much as you like into the savings account. If your savings balance is 100% of your mortgage, you won't be charged any interest.

What if my savings are higher than my mortgage balance?

If your savings are higher than your mortgage balance, you will pay no mortgage interest but you'll also get no benefit from the extra amount of money in your savings account.

Saving the extra sum in a separate high-interest savings account or similar investment may be more beneficial. You could also potentially use the additional savings to overpay your mortgage, if the terms on your mortgage allow this.

Can I get a buy to let offset mortgage?

There are lenders that offer offset mortgages for buy-to-let properties, but most only offer this option for residential mortgages.

Can I get an offset remortgage?

Yes, if you currently have a standard mortgage, it is possible to switch to an offset deal by remortgaging.

If you plan to remortgage before your existing mortgage deal has come to an end, check whether you will need to pay any early repayment charges.

Is an offset mortgage a good idea?

There are various advantages and disadvantages to offset mortgages.

It helps you reduce the amount of interest you owe, which could either allow you reduce your mortgage term or your monthly repayments.

However, you won't earn any interest on the savings. So, you should check that you'll save more on your mortgage than you could get by putting the money into a separate savings account.

To find out if it’s the right option for you, it can be useful to get advice from an expert mortgage broker.

What are the best offset mortgage rates?

Offset mortgage interest rates are typically a bit higher than ordinary mortgages, but not significantly. They often fall at about the mid-market rate level, and the rates you can access will vary based on your LTV and credit score, as with any other mortgage.

Can I repay my mortgage early with an offset mortgage?

Once your savings have been offset against your mortgage, you can normally choose either to reduce your monthly repayments or keep them the same.

If you keep them the same, you're essentially overpaying your mortgage each month. This will allow you to pay off the loan earlier and reduce your overall mortgage term.

Should I put down a bigger deposit instead of getting an offset mortgage?

It might be worth trying to put down a bigger deposit instead of offsetting your savings against your mortgage. This is because the more the deposit amount, the lower the loan-to-value ratio and this typically allows you better access to rates and deals. So, you may find you can pay save more money by putting down a larger deposit than going for an offset mortgage.

It's worth speaking to an mortgage broker who can compare mortgage deals from across the market to find the right option for you and your circumstances.

About the author

Author imageAtousa Cunnell
Atousa Cunnell
Atousa is a Content Producer for money.co.uk, responsible for writing and editing a wide range of mortgage content that are helpful to the reader.

money.co.uk is not a mortgage intermediary and makes introductions to Mojo Mortgages to provide mortgage solutions.

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