Offset Mortgages

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What is an Offset Mortgage?

With an offset mortgage, you link your current and or savings account balances to your mortgage which then reduces the overall interest you need to pay. An offset mortgage can be linked to one or even multiple bank or building society accounts. 

The offset funds can either reduce your monthly payments or shorten the payment term to help you pay off your mortgage quicker and potentially save thousands of £’s in interest.

Although offset mortgages come with a large amount of flexibility, they can be available with fixed interest rates, however, it is far more common for an offset mortgage to be offered with a variable rate.

offset mortgage

How does an Offset Mortgage work?

Firstly, your offset mortgage and the accounts that you want to link with, will usually need to be held with the same financial provider and the money will usually need to be held in a specific offset account. 

The interest you owe on your mortgage will then be calculated based on the total amount you have borrowed for your mortgage, minus the amount of money that is held in the linked account(s).

So for example if you have £150,000 owing on your mortgage and £50,000 in your linked offset accounts, the interest payable would be calculated on £100,000.

You can either benefit from having lower monthly mortgage payments due to the lower interest rate bill or you can opt to keep you monthly payments at the same level that they would have been without any funds offset and reduce the overall term of the mortgage, so that you pay off your loan and become mortgage-free sooner.

Not all lenders offer the ability to lower your monthly payments when using an offset mortgage so be sure to check the details carefully depending on your intended strategy.

With some offset mortgages you will be able to change whether your funds reduce the term or the monthly payment as many times as you like throughout your mortgage term, whilst with others you will need to make the choice at the start and stick with it.

How much could I save by using an Offset Mortgage?

To get an initial idea of how much you could save in interest you can use our offset mortgage calculator.

Offset Mortgage Calculator

An offset mortgage lets you use your savings to help reduce the interest you pay on your mortgage and could save you money in the long term. However often the rates on offset mortgages can be higher than a standard deal so our calculator will help you work out if an offset deal could be right for you. 

Of course there are lots of other things to consider so it’s worth speaking to us too and we can run through the options with you.

How to Use Offset Mortgage Calculator
  • Enter your current or expected mortgage amount and term
  • Enter the details of your savings, both current and any monthly amount you plan to add. Enter How long you want to compare your offset vs a standard mortgage. It is best to compare over the product period i.e 2 years if you are looking at a 2 year tracker rate for example.
  • Enter the interest rate and any fees payable for a standard mortgage
  • Enter the interest rate and any fees payable for an offset mortgage
  • Calculate
How big is your mortgage?
£
years
How much do you have in savings?
£
%
£
years
Using a standard mortgage
%
£
Using an offset mortgage
%
£
Will you slash the interest you pay?

Here's how much offsetting your savings could save on your monthly and annual mortgage repayments, and by how long it could reduce the term of your mortgage (assuming rates stay the same).

The tables below factor in any interest lost on your savings to calculate the true cost over each year. Offsets generally win over the long-term (see graph), but you could save more by going for a cheaper short-term standard deal and switching to another when the term is up.

Note: Those with a relatively small sum in savings compared with their mortgage balance will probably not find offset the best option. Higher-rate taxpayers who earn less from their savings after tax is deducted may be best off with an offset, compared with the top paying savings account. They also suit those who'd like to overpay but don't want to lose access to their savings.

Standard mortgage + savings vs offset mortgage
MORTGAGE & SAVINGS OFFSET MORTGAGE
Monthly repayment
In first year
Interest cost
Interest earned on savings
Net interest cost
Total costs over 3 years
Interest cost
Interest earned on savings
Net interest cost
Over full term*
Interest cost
Interest earned on savings
Net interest cost
Net interest cost per year

This illustrates how your outstanding mortgage balance will decrease over the term of your loan. This does not account for interest rate changes or other fees such as early repayment charges.

Advantages of an offset mortgage

  • If you can make good use of the offset features then you will owe less in interest overall and ultimately be able to pay off your mortgage sooner.
  • You still have access to your funds in the current account and savings account should you need them in an emergency.

Disadvantages of an offset mortgage

  • Higher rates can often be charged for offset mortgages, due to the flexibility they offer compared with other mortgage products. To compare the rates of offset mortgages with other types of mortgages, use our mortgage comparison tool.
  • You won’t usually earn interest on any savings that you are using to offset your mortgage.

Final Considerations

Whether an offset mortgage is right for you will depend on your individual circumstances and financial situation. 

Offset mortgages are complicated and to work out how much you will actually benefit from this mortgage type can be confusing so we advise that you seek expert advice. You can get in touch with our team of mortgage advisers, it’s free!

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