Offset mortgages explained
- How an offset mortgage differs from other mortgages
- What are the benefits?
- What are the drawbacks?
- Who should take out an offset mortgage?
What is an offset mortgage?
An offset mortgage is linked to one – or sometimes multiple – bank accounts. Each month, your mortgage lender calculates the interest you owe based on the total amount you have borrowed - but with an offset mortgage, this amount is reduced by the amount held in the linked accounts.
So if you have borrowed £200,000 and have savings of £20,000, you will only be paying interest on £180,000. As your savings go up or down over time, so will the amount of the mortgage on which interest is charged.
What is the difference between an offset and Current Account Mortgage?
Where an offset mortgage is linked to a separate bank account, a Current Account Mortgage (CAM) combines your debts and savings into a single account – where, like an offset mortgage, the savings you have reduce the interest payable on your debt. As well as your mortgage, these accounts can sometimes also include balances for loans and credit cards.
What are the benefits of an offset mortgage?
- As you pay less in interest, offset mortgages can help reduce your monthly repayments, or enable you to repay your loan early.
- You continue to have access to your money, should you need it.
- Deals can be quite flexible – you can offset savings and current accounts against your mortgage, and they don't always have to be held with the mortgage lender.
What are the downsides?
- Money held in offset accounts won't earn you interest.
- If you don't have much saved, you won't save much on the mortgage, and might be better choosing an alternative deal with a lower interest rate.
Is an offset mortgage for me?
Offset mortgages are typically suited to people who also have large, stable amounts of savings. It's critical to remember, though, that when offset against a mortgage, these savings won't earn you interest.
For higher-rate and additional rate taxpayers, offsetting against a mortgage can prove efficient. This is because the saving you would make on your mortgage isn't tax deductible.
Offset mortgages can also be a means for family members to help reduce the mortgage burdens of relatives by storing some of their savings in an offset account. For more on this, see our guide - First time buyer help from parents.
You should seek independent mortgage advice as well as doing your own research if considering an offset deal. The Which? Group offers an independent mortgage advice service that looks at every mortgage from every available lender. Alternatively, visit Unbiased.co.uk to search for a broker.