What is an offset mortgage?
An offset mortgage is linked to one, or sometimes multiple, bank or savings accounts, and allows you to use your cash savings to decrease your interest payments.
For a standard mortgage, your interest payments are calculated based on the total amount you owe.
With an offset deal, you deposit your savings into an account that is linked to your mortgage. These savings are deducted from amount you owe before interest is calculated – so you only pay interest on the difference.
For example, if you have a mortgage of £300,000 linked to an account holding £20,000, you would only pay interest on £280,000.
Over a full mortgage term, this means you could save thousands of pounds in mortgage interest payments.
What’s the best type of mortgage for you?
Which? Mortgage Advisers can explain your options and find you the best deal.
Is an offset mortgage cheaper?
One of the benefits of an offset mortgage is that it can reduce the amount of interest you need to pay.
But keep in mind that your repayments would still be based on the full loan amount.
When you make a mortgage payment, part of the money goes towards the interest charged by your lender and the other towards repaying the capital (the money you borrowed).
An offset account will only reduce the interest portion of your payments.
Offset mortgages can also come with slightly higher interest rates than ordinary repayment mortgages.
If you have a relatively small amount of savings, you might save more money by searching instead for the lowest-rate mortgage deal available to you.
Find out more: finding the best mortgage deal
Can you shorten your loan term?
Rather than making smaller monthly payments, you can use an offset account to pay off the loan more quickly.
If you increase the balance in your offset account, but continue paying the same amount towards your mortgage each month, more of your money will go towards repayments.
This could help you pay off your mortgage faster. But check the terms of your mortgage contract to see whether overpayments are allowed and whether an Early Repayment Charge could apply.
Can you access your savings?
You can generally deposit and withdraw money from the savings or current account linked to your mortgage, although some lenders may require you to keep a minimum balance.
If you make a withdrawal, the money will no longer offset your mortgage.
For example, if you still owed £250,000 on your mortgage linked to an account with £20,000, you would only pay interest on £230,000.
But if you withdrew £10,000, you would then pay interest on the higher amount of £240,000.
If you have little or no money in your linked accounts for a long period of time, it may be worth considering switching to a different type of mortgage.
Keep in mind that you normally won’t earn any interest on money held in linked accounts – so if interest rates are high, you might be better off keeping your money in a high-interest savings account instead.
Offset mortgages and tax
For higher-rate and additional-rate taxpayers in particular, offset mortgages could be a tax-efficient way to use your savings.
You won’t pay any tax on savings income, or use up your Personal Savings Allowance, because you won’t be earning interest on your cash.
Your savings will still be generating a return – by bringing down your interest payments – but you won’t face a tax bill.
Find out more: tax on savings interest
Family offset mortgages
Offset mortgages can also be a way for people to help family members with mortgage costs by storing some of their savings in an offset account linked to a relative’s mortgage.
If you want to help your child or another family member get on the property ladder, check out our guide to family offset mortgages.
Pros of offset mortgages
- as you owe less in interest, you effectively overpay your mortgage each month, enabling you to pay it off quicker
- alternatively, you can reduce your monthly repayments
- you can still access your money if you need to make withdrawals
- offset mortgages can be tax-efficient if you generally earn savings income
- deals can be quite flexible, with some lenders allowing you to offset both savings and current accounts against your mortgage.
Cons of offset mortgages
- interest rates on offset mortgages can be higher than comparable standard repayment mortgages
- with most offset mortgages, you won't earn interest on any cash held in accounts linked to the mortgage
- not many lenders offer offset mortgages, so your choice can be quite limited
- you may be better off buying with a bigger deposit or paying down your loan.
Should you put down a bigger deposit?
If you have additional funds available when you go to buy a property, it may be worth putting it towards your deposit rather than into an offset account.
Say you bought a £400,000 property with a £100,000 deposit and an offset mortgage loan of £300,000. If you had, for example, £20,000 in your linked account, with an offset mortgage this means you would only pay interest on £280,000 of your loan.
If, instead, you used that £20,000 from your linked account to put down a bigger deposit of £120,000, you would only need to borrow £280,000.
With both options you would pay interest on £280,000 – but with a larger deposit, your actual loan will also be smaller, meaning your repayments will be lower and the interest rate is likely to be better.
When you want to sell your property or switch to a new mortgage deal, having a lower loan-to-value (LTV) can increase the range of mortgage deals available to you, as well as give you access to cheaper mortgage interest rates.
Then again, you may be reluctant to tie up your savings in a house deposit, where you can’t access them. In this situation, an offset mortgage can give you the flexibility to withdraw cash when you need it.
Find out more: how much deposit do you need for a mortgage?
Is an offset mortgage right for me?
For an offset mortgage to really save you money, you would generally need a large amount of cash that you can afford to leave untouched in a linked account.
For example, let's assume you take out a £200,000 mortgage for 25 years with a 3% interest rate, and you also have £5,000 in a linked savings account, so you pay interest on £195,000.
The table below shows your options:
|£5,000 in savings||£20,000 in savings|
If you want to pay off your mortgage quicker
|The loan is repaid after 24 years and 7 months, and you save £5,440 in interest||The loan is repaid after 23 years and 3 months, and you save £20,150 in interest|
|If you want to reduce your monthly repayments|| |
You save £3,740 in interest
|You save £14,540 in interest|
|If you had an instant-access savings account with a 1% interest rate||You would earn £1,419 in interest|| |
You would earn £5,678 in interest
You could pay off the mortgage five months earlier and save £5,440 in interest payments.
Alternatively, you could reduce your monthly repayments and keep the same mortgage term, saving £3,740 in interest.
Meanwhile, if you left the money in an instant-access savings account paying 1% for 25 years, you would only earn £1,419 in interest.
If you had a larger amount of savings, for example £20,000, you'd only pay interest on £180,000. This would enable you to pay off the mortgage about two years early, saving £20,150.
If, alternatively, you chose to reduce your monthly repayments and keep the same mortgage term, you would save £14,540 in interest.
Meanwhile, leaving the money in an instant-access savings account at 1% for 25 years would earn you £5,678 in interest.
Offset versus current account mortgage
While an offset mortgage is linked to a separate bank account, a current account mortgage (CAM) combines your debts and savings into a single account.
Like an offset mortgage, the savings you have reduce the interest payable on your debt.
CAMs can sometimes include balances for loans and credit cards as well as your mortgage.