What is a mortgage? Offset mortgages
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.
When we surveyed 5,000 mortgage holders in April 2016, 23% told us their mortgages were linked in some way to their bank account.
- Which? Mortgage Advisers can offer tailored mortgage advice for your personal circumstances. Call 0808 252 7987 for a free consultation
2.67%Average offset rate - June 2016
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.
- If you want to help a family member get on the property ladder, check out our guide to family offset mortgages
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.
- Which? Money Helpline - for advice on property sales and purchase
- How to get the best mortgage deal - an overview of what to look for
- Which? Money Compare - for the latest saving rates
Your home may be repossessed if you do not keep up repayments on your mortgage.
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