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, the best offset mortgage rates currently available 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, assuming 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. 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 would 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. It also doesn’t take into account any fees.

The best mortgage depends on your personal circumstances. The award-winning expert advisers at Mortgage Advice Bureau will find the right mortgage for your individual circumstances.

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Offset mortgages pros and cons

When deciding whether an offset mortgage is right for you, here are some of the pros and cons to consider:

Advantages of offset mortgages

• 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.
• Tax advantages: You’ll need to pay tax on interest earned over a certain threshold if your savings aren’t in an ISA. 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 typically 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.

Get personalised advice by speaking to the award-winning expert advisers at Mortgage Advice Bureau. Compare deals or speak to an adviser today.

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 mortgage broker.

Best offset mortgage rates

Here are the best offset mortgage rates currently available:

• Offset mortgages generally have higher mortgage rates.
• Just like with any mortgage, if you’re considering an offset mortgage, you’ll need to consider carefully which is the best deal for you.
• The easiest way to do this is by speaking to a mortgage broker. The award-winning expert advisers at Mortgage Advice Bureau will find the right mortgage for your individual circumstances.

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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 getting fee-free mortgage advice from a broker.

Types of Offset mortgage

Different types of offset 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

It’s also possible to get ‘Family Offset mortgages’ and there are two different ways in which these work:

• In the most basic form, these mortgages work in the same way as a standard offset mortgage. Only, it’s a family member or friend that keeps their money in a separate account to reduce the mortgage interest their loved one pays. The family member won’t earn any interest on their savings but it’s a way of helping a loved on financially without gifting cash. One family offset mortgage provider in the UK that offers this type of mortgage is Yorkshire Building Society’s ‘Offset Plus’.
• But there are also family offset mortgages that are a type of guarantor mortgage where the mortgage interest paid can be reduced by a family member putting savings in a linked account but this can also form additional security. This means the family member may not be able to access their savings until certain criteria are met and their savings could be at risk if the mortgage holder defaults.

If you’re considering a family offset mortgage, make sure you get expert advice. You can get fee-free mortgage advice from the award-winning expert advisers at Mortgage Advice Bureau. Compare deals or speak to an adviser today.

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 find the right mortgage for you.

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. You can arrange a Mortgage Agreement in Principle today with the fee-free service provided by Mortgage Advice Bureau.

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.

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Frequently Asked Questions