Offset mortgages explained

Offset mortgages allow you to pay less interest on your mortgage by ‘offsetting’ your savings against your mortgage balance. Here’s how they work and the pros & cons.

What is an offset mortgage?

An offset mortgage is a type of mortgage that allows you to reduce the amount of interest you pay by ‘offsetting’ your savings against your mortgage balance. The mortgage amount you’ll pay interest on will be your mortgage balance, minus the amount in your savings account.

How do offset mortgages work

When you take out an offset mortgage, you’ll also need a linked savings account. The money saved in it will be deducted from your mortgage balance when your lender is calculating how much interest you owe.

Offset mortgage example

Here’s a worked example of how these mortgages work and how much money you may be able to save if you take out a £200,000 mortgage and have £50,000 in savings:

• With an offset mortgage you’ll pay interest on £150,000 not the full mortgage amount of £200,000. This means you’ll pay less interest on your mortgage, although you won’t earn interest on your savings.
• If you take out the mortgage over 25 years at 5%, you’ll pay £877 per month on an offset mortgage of £150,000, compared to £1,169 a month on the full mortgage balance of £200,000. This is a monthly saving of £292.
• However, if you have £50,000 in a savings account earning 2% interest, you’ll earn around £83 a month (gross).
• In this example, you could save around £209 a month with an offset mortgage. Although this doesn’t take into account that you’re likely to pay a higher mortgage rate on an offset mortgage.

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Offset mortgages pros and cons

When deciding whether an offset mortgage is right for you, you need to weigh up the pros and cons:

Advantages of offset mortgages

• Lower mortgage costs: You’ll pay less interest on your mortgage. Many deals let you choose whether to use this benefit to reduce your monthly mortgage costs or to maintain your normal mortgage payments and therefore pay your mortgage off sooner.
• Flexibility: You can usually access your savings if you need to, which is more flexible than if you use your savings to make mortgage overpayments.
• Can help first time buyers: With family offset mortgages, a family member (usually a parent) can use their savings to reduce the amount of interest their child or family member pays on their mortgage. Read more in our guide The Bank of Mum and Dad: How to help your child buy a home.
• Avoids poor savings rates: As interest rates on savings account get cut by lenders, this may be good way to use your savings.
• Tax advantages: You’ll need to pay tax on interest earned over a certain threshold. Find more information on the government’s website. By using your savings in an offset mortgage, you can avoid this.

Disadvantages of Offset mortgages

• Higher interest rates: Lenders typically charge higher interest rates on offset mortgages than standard mortgages.
• Smaller choice of lenders: These mortgages are less common so you may have a smaller pool of lenders to choose from.
• Higher deposit requirement: Offset mortgages often require a minimum deposit of at least 15%, unlike standard mortgages which you can get with a 5% deposit (or even no deposit).
• No income on your savings: You won’t earn any interest on savings in your linked savings account. So you’ll need to take this into account.
• Mortgage payments can go up: If you withdraw money from your linked savings account, your mortgage payments may go up or it may take you longer to pay it off.

Which banks offer offset mortgages?

Some lenders the offer these mortgages include:

• NatWest
• First Direct
• Barclays
• Yorkshire Building Society (YBS)
• Coventry Building Society
• Santander

But the best mortgage lender for you will depend on your circumstances. So get expert advice from a fee-free mortgage broker.

Best offset mortgage rates

• Offset mortgages generally have higher mortgage rates. At HomeOwners Alliance, our snapshot research of the best mortgage rates found offset mortgage rates were typically at least 0.5 percentage points higher than their equivalent standard mortgage.
• So you’ll need to consider carefully which is the best deal for you. The easiest want to do this is by speaking to a fee-free mortgage broker.

Get fee-free mortgage advice from L&C, they’ll compare offset mortgages to find you the best deal. Chat to them today or start online.

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Types of Offset mortgage

Different types of offset mortgage mortgages include:

• Offset fixed mortgages: This means you’ll pay a fixed rate of interest on your offset mortgage balance during your initial term.
• Variable rate offset mortgages: You can also get offset tracker mortgages and discounted variable rate offset mortgages. With these mortgages, the rate you’ll pay can go up or down.
• Family offset mortgages: A family offset mortgage, sometimes known as a ‘parent offset mortgage’, is a type of offset mortgage that links the savings of a family member (usually a parent) to a child’s (or other family member’s) mortgage. 

Are offset mortgages a good idea? Expert view

So it’s important to get advice based on your circumstances. The easiest way to do this is by speaking to a fee-free mortgage broker.

How to get an offset mortgage

Here’s the step by step process of how to get an offset mortgage.

1. Compare offset mortgages

Start by finding out what your mortgage options are. Speaking to a fee-free mortgage broker is the quickest and easiest way to do this.

2. Get a Mortgage in Principle

Your next step is to get a Mortgage in Principle (sometimes called an agreement or decision in principle). This is a statement from a lender on how much they would lend you ‘in principle’ based on information you have provided about your income and outgoings. Arrange a Mortgage Agreement in Principle today with the fee-free service provided by L&C mortgage brokers

3. Apply for your mortgage

Once you’ve chosen your mortgage deal, it’s time to start the formal mortgage application process. Your mortgage broker can take this forward for you.

How common are offset mortgages?

Data from the Financial Conduct Authority’s (FCA) Mortgage Lending and Administration Return shows that in December 2022, there were 830,000 offset mortgages, which represented a total of 7% of all mortgages in the UK.

Get fee-free mortgage advice from L&C, they’ll search over 90 lenders to find you the best deal. Chat to them today or start online.

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Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.

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Frequently Asked Questions