Offset mortgages

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An offset mortgage lets you balance your savings against the amount you owe on your mortgage, reducing how much interest you pay.

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

What is an offset mortgage?

An offset mortgage lets you balance your savings against your outstanding mortgage payments. If you have both savings and a mortgage with the same provider, you can have the accounts linked.

This means that instead of earning interest on your savings, you save paying interest on part of the amount of mortgage loan you still need to pay back. An offset mortgage might be a good option if you have savings because the interest charged on a mortgage is usually bigger than the amount of interest you can earn on a savings account.

How does offsetting work?

If your mortgage was worth £150,000, and you had £20,000 in savings, you could offset those savings and only pay interest on the remaining £130,000.

If your interest rate was 3% on the £150,000 mortgage – which would be £4,500 a year – that would be reduced to 3% of £130,000, or £3,900. This would give you a saving of £600.

But because you’re losing interest on your savings account, you’d need to factor this into the total amount saved.

For example, if you had a savings pot of £20,000 earning 1.5% interest, you would earn £300 a year. But because you now lose this interest, the total amount saved works out to be £300 – which is the £600 saved on your mortgage interest minus the £300 you could’ve earnt in interest.

Long-term vs. short-term savings

With offset mortgages, your actual payments will usually be based on the full mortgage amount – including the savings amount. So in the example above, you might have a mortgage amount of £150,000. This means you’re effectively overpaying on your outstanding mortgage each month, so you’ll end up paying it off quicker.

But some lenders will calculate your monthly payments based on the value of your mortgage after your savings have been offset - so in this example, £130,000. This might mean that you end up paying back less each month, but you won’t pay your mortgage off any quicker.

Draw down

Some offset mortgages let you draw down on the overpayments you make to your mortgage - because you’re overpaying, you can either choose to withdraw that money if you need it, or rather than withdrawing it, you can simply not make your payment - or reduce it - some months. 

Accessing your savings with an offset mortgage

When your savings account is linked to your mortgage, you should still be able to dip into your savings account whenever you need to. But it’s worth checking what the minimum balance is that you’ll need to keep in your account.

Any money you do withdraw will no longer offset your mortgage, so if you took out £5,000 from the account in the above example, you would be left with £15,000 to offset. This means you would pay interest on £135,000 instead of £130,000.

Offset mortgage rates

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

Fixed rate deals usually offer a better deal than standard variable rate – SVR – mortgages and can last for two, three, five, or 10 years before moving you onto the lender’s SVR, but a few can be fixed for the whole mortgage term.

Other offset mortgage types include:

  • A tracker mortgage: when the interest rate is variable and follows the Bank of England base rate.
  • A discount mortgage: when you’re given a set discount on the lender’s SVR.

These deals often last for two years before you move onto the SVR, but you can also choose deals that last the whole term. SVR mortgages are also available for the whole term and can be more flexible than other mortgage types.

Some deals will allow you to offset your current account as well as your savings account. You may also be able to link your cash ISA, if you have one. The more savings accounts you can link to your mortgage, the harder your cash will be working to reduce your debt.

Your savings and mortgage will have to be with the same provider though to benefit from an offset mortgage - you won’t be able to link a savings or current account to your mortgage if it’s with a different bank or building society.

A graph showing an example of a tracker mortgage following the Bank of England base rate at 1.5%

This graph is an example of a tracker mortgage’s interest rates if the deal was set at 1.5% above the Bank of England base rate – tracking from July 2007 to August 2018.

What are the advantages of offset mortgages?

The main advantages of having an offset mortgage include:

  • Being able to overpay your mortgage each month, which means you pay it off sooner
  • Or being able to reduce your monthly payments - though this won’t help you pay your mortgage off any quicker
  • In most cases you can still access your savings account, making your finances more flexible
  • The possibility of using your current account as well as your savings account to offset your mortgage
  • 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

What are the disadvantages of offset mortgages?

While an offset mortgage can work well for some, it might not be the right mortgage type for everyone. The possible disadvantages of an offset mortgage include:

  • Offset mortgages often have higher interest rates in general
  • You won’t earn interest on your savings and/or current account
  • There may be less choice compared to other mortgage options
  • It may not be so beneficial if you only have a small savings pot
  • Offsetting can give you a lower loan-to-value – LTV – than typical mortgages, which means you’ll probably need to put down a larger cash deposit to make up any difference

There is no rule for how much you should have in savings to make an offset the best option - it will depend on the mortgage and savings interest rates available at the time. This means it’s always best to shop around for the best deal.

A map showing the average house prices in the UK for 2016 – 2018

The average prices of houses in the UK for 2016 - 2018, according to UK Finance data.

Comparing offset mortgages to find the best deal

You can compare offset mortgages on MoneySuperMarket by the initial interest rate and monthly cost, the annual interest rate, the type of interest rate you’ll be on, and whether there are any product fees included.

All you need to do is enter some details about how much you need to borrow and over what period of time, the value of your property, and whether you’ll repay interest only or both interest and capital. Filter the results to show offset mortgages to compare quotes. This will give you a list of quotes that match your loan-to-value, so you’ll be able to choose the best deal from a selection tailored specifically to you. You can also compare mortgage quotes using an unfiltered view to see if an offset mortgage is the right type of deal for you.

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

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