Taking out a mortgage and buying a property can be daunting. You’ve got to save a deposit, meet the monthly payments, secure a good deal and find the right home. Luckily, there are options available that can help you save money and make the most of your situation, such as offset mortgages. These mortgages enable borrowers to offset their savings against their mortgage debt, allowing them to potentially reduce the interest payments.

So what do we mean by offset? If you offset something you balance it against something else to cancel or reduce the effect. With a mortgage offset, your savings are offset against (counterbalance) your mortgage to reduce the amount of interest you’re charged. Essentially the lender subtracts your savings held in a linked account from your outstanding mortgage balance at that time. Interest is then charged on the remaining, smaller figure, instead of the total outstanding mortgage balance.

Below we’ll explain everything you need to know about offset mortgages, from the different types available to the things you need to consider before making your decision, as well as which banks offer offset mortgages. We also have an offset calculator to help you compare rates from different banks and lenders.

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What Is an Offset Mortgage?

So what is an offset mortgage? An offset mortgage is a mortgage with a savings or current account that’s linked to the mortgage account. This savings account is sometimes referred to as "offset account". The point of this savings account, and offset mortgages in general, is to enable you to use your savings to reduce the amount of interest you’re charged. The savings held in the account are subtracted from the outstanding mortgage balance and interest is then charged on the remaining figure.

For example, if you have a mortgage of £200,000 and savings of £50,000 in a linked account, you would only be charged interest on £150,000. This arrangement can lead to substantial interest savings over the life of the mortgage, shorten the loan term, or both.

When you decide to pursue an offset mortgage, your lender will help you set up a savings account that is attached to the arrangement.

You can benefit from the reduced interest charges in 2 main ways, you can either:

  • Make lower monthly payments with a payment reduction offset
  • Make the same monthly payments that you would on a normal mortgage, so that you essentially make overpayments on your mortgage and pay it off quicker, with a term reduction offset

Payment reduction offsets are available on both repayment and interest-only bases. Term reduction offsets are usually best applied to repayment mortgages.

It's worth bearing in mind that fewer lenders offer offset mortgages which means they often come with slightly higher rates than comparable products. Eligibility criteria may also vary among lenders. Therefore, it’s important to carefully assess your financial situation to determine if an offset mortgage aligns with your goals and circumstances.

If you’re still on the fence, our offset mortgage repayment calculator can give you some more information on what your repayments could depending on your outstanding mortgage balance. You can also contact our financial experts, who will review your full situation and advise on the most appropriate course of action for your circumstances. Call us on 0330 433 2927.

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Types of Offset Mortgages

There are a variety of offset mortgage products on the market, so it’s a good idea to learn more about them when figuring out which is the best offset mortgage for you. We go through some of the different offset mortgage available below.

Repayment Offset Mortgages

Like with standard repayment mortgages, with a repayment offset mortgage you make regular capital and interest payments. Payment reduction offsets and term reduction offsets are both available as repayment products.

Interest-Only Offset Mortgages

Like with standard interest-only mortgages, interest-only offset mortgages mean you only make regular interest payments and not capital payments. You pay back the total outstanding mortgage amount at the end of the mortgage term. Interest-only offset mortgages are typically only available with payment reduction, not term reduction. There also typically aren’t as many interest-only offset mortgage products available as lenders have strict requirements regarding repayment vehicles and some may not be confident that the savings held in the linked account would be a suitable.

Fixed Rate Offset Mortgages

A fixed rate offset mortgage is an offset mortgage where the interest rate is fixed for a period of time, such as 2 or 5 years. After this you’ll be transferred onto your lender’s SVR (standard variable rate), unless you remortgage onto a new deal. Fixed offset mortgage rates are ideal if you’re looking to have consistent and predictable payments for an extended period.

Tracker Rate Offset Mortgages

It is possible to get a tracker rate offset mortgage, but these are rarer than fixed rate ones. This is because a tracker rate moves in line with the Bank of England Base Rate and therefore can differ over the course of the mortgage, making calculating your monthly payments - which can already vary due to the setup of the offset - more complicated to calculate.

Buy-to-Let Offset Mortgage

An offset mortgage for a buy-to-let property allows landlords to increase their overall cash flow as they’ll receive a higher net profit from letting. However, bear in mind when considering an offset mortgage for a buy-to-let property that they are quite rare and you won’t earn any interest on the savings linked to your offset mortgage.

Would You Benefit from an Offset?

Offset mortgages are particularly useful if you have significant amounts in savings – or are expecting to acquire some in the near future – and you require a mortgage. You can access your savings when needed, as well as having the freedom to vary monthly payments as long as you can meet the minimum required amount.

They're also effective if you wish to pay more towards your mortgage balance on a regular basis but would like access to those funds at any time. Furthermore, offset mortgages are available for purchases or remortgages, and the interest savings from offsetting can potentially outweigh the returns from traditional savings accounts.

Here are some other benefits of an offset mortgage:

  • Reduced interest payments – with a payment reduction offset, your savings can help reduce the amount of interest you’re charged. This can result in lower overall interest costs and monthly payments
  • Faster loan repayment – with a term reduction offset, you make the same monthly payments on your mortgage, essentially making overpayments which can help you pay off your mortgage quicker
  • Tax efficiency - as a general rule, you have to pay Income Tax on the interest earned on savings. The benefit of an offset mortgage is that by using your savings to offset, you won’t have to pay tax on the savings

John Charcol Expert Tip - February 2024

"Offset mortgages can prove advantageous, especially if you maintain substantial savings or anticipate acquiring them shortly. With an offset mortgage, you gain the flexibility to access your savings when needed, along with the freedom to vary monthly payments, provided you meet the minimum required amount.

These mortgages are particularly effective if you aim to make regular additional payments towards your mortgage balance while retaining access to those funds at any time. Additionally, offset mortgages are applicable for both property purchases and remortgages."

- Mortgage Technical Manager Nick Mendes, CeMAP qualified

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Process for Buying a Home/Remortgaging

1. First Conversation with Adviser

When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you. Your adviser will ask you some questions then go away and find you the best deal for your circumstances and future needs. They’ll organise a follow up during which they’ll present you with what they’ve found.

2. Decision in Principle

Once you’re happy with their recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.

3. Offer on Property/Remortgaging

After the lender has agreed your scenario, you’ll be in a position to make an offer on a property or move forward with the remortgaging.

4. Pre-Application and Submission

Following the acceptance of your offer, we’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.

5. Lender Underwriting and Valuation

The lender will underwrite your application; this basically means they’ll verify that the information you’ve provided is correct and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property to make sure there are no significant problems with it.

6. Mortgage Offer

If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.

7. Conveyancing

After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property/remortgaging. If buying, you’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.

8. Exchange and Completion

If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor; it’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date. If you’re remortgaging, then your conveyancer/solicitor will set a date to draw down the funds and pay off any existing lender(s) once the mortgage offer’s released.

Things to Consider When Taking Out an Offset Mortgage

Differences Between Lender Criteria

Whilst every offset product achieves the same goal in principle, there are some subtle differences between lenders.

A few of the main differences include:

  • The number of accounts that can be linked to your mortgage
  • Some lenders will accept savings from a family member to be offset against the mortgage, subject to specific requirements
  • The type and notice arrangements of these accounts
  • The access you have to your savings should you need them
  • The offset products they offer, whether it’s payment reduction, term reduction or both

Overpayment Options

Term reduction offsets allow you to essentially make overpayments with no penalties, which is immensely advantageous, as overpayments typically contribute to the shortening of the loan term and saving you significant amounts in interest. However, the extent to which you can overpay varies between lenders and mortgage deals, so understanding these terms is essential.

Interest and Overall Financial Benefit

While offsetting savings against mortgage debt can lead to interest savings on your mortgage and save you from paying Income Tax on the interest charged on your savings, this doesn’t necessarily mean you’ll be financially better off overall. This would depend on things like the Base Rate at the time.

This is because some savings accounts may earn you more interest (even with Income Tax charged) than what you save in interest with an offset mortgage.

Home Insurance and Protection

It’s also important to consider additional options with your home insurance and protection, including when applying for an offset mortgage.

Typically, buildings insurance safeguards your property's structure against risks like fire, flooding, and damage caused by natural disasters. It is required for almost all types of lending, including offsets.

Protecting yourself as well as your property is equally important, especially with an offset mortgage. As, for example, rather than using your savings to help you through unforeseen events like losing a job or a health issue, mortgage protection would help you cover your mortgage payments and protect your home and savings.

Our in-house protection team can arrange Critical Illness Cover, Income Protection, Life Insurance and more.

Offset FAQs

Can I Get a Buy-to-Let Offset Mortgage?

It is possible to get an offset mortgage or remortgage on a buy-to-let property, but they're quite rare.

Are Offsets Only for Higher Rate Taxpayers?

Although offset products come with strong benefits for higher rate taxpayers, all offset borrowers will benefit from the ability to reduce their mortgage terms or monthly payments.

Can I Get an Interest-Only Offset Mortgage?

You can get an interest-only offset mortgage, but they only really work with payment reduction. It's possible to take out interest-only offsets for residential purchases and remortgages, as well as buy-to-let purchases and remortgages.

Do Offsets Cost More?

Offset products tend to come with slightly higher rates than normal mortgages, although the fees are generally the same. Nonetheless, the benefits offered by the linked savings account can more than make up for any extra cost.

If you want to see what kind of rates are available for normal mortgage products - i.e. those without a linked savings account - you can compare the best fixed rate mortgage deals or trackers currently available.

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