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04 Nov 2020
Jamie Gibbs Alice Campion

Offset mortgages: how do they work?

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people considering an offset mortgage

Everything you need to know about offset mortgages and how much you might save. 

If you’ve got a good chunk of savings, you could save on interest by offsetting your mortgage.

But is this money better used for a deposit? And how much can you save by taking out an offset mortgage? Here’s what you need to know. 

We don't compare this type of mortgage - this guide is for informational purposes only. But you can compare remortgages.

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What is an offset mortgage? 

An offset mortgage links your mortgage to your savings account. 

The amount you save is taken from what you owe on your mortgage amount, reducing your interest payments. 

Often, the interest saved with an offset mortgage is much more than the interest you’d earn on a savings account. 

 

How does an offset mortgage work? 

Your lender will put your savings into an interest-free savings account that’s linked with your mortgage. Let’s use a mortgage of £200,000 as an example. 

If you have savings worth £20,000 and you offset them against your £200,000 mortgage, you’d only pay interest on the remaining £180,000. 

With an offset mortgage at 5% you’d pay £1,090 instead of £1,170, that’s a saving of £80 per month.

Your £20,000 in a 1.5% interest savings account would make you £30 a month. You’d save £50 a month overall if you consider this. 

Although you won’t earn interest on your savings in an offset mortgage, the amount won’t change. 

Remember: you still pay the full mortgage amount. The offset amount only reduces the portion of your mortgage you pay interest on. 

 

How much can I save if I offset my mortgage? 

The higher the amount you can put into the offset mortgage, the more you’ll save on interest payments. Let’s use our £200,000 mortgage example again. 

If you save £6,000 with a 3% interest rate over a 25-year term, you could save £4,440 over the term. £370 per year. 

But if you save £20,000 at the same rate over the same term, you could save £14,540 in interest over the term. £580 per year. 

 

What are the pros and cons of an offset mortgage? 

Offset mortgages sounding good so far? Let’s look at the pros and cons: 

 
Pros Cons

The savings on interest will work out more than the interest earned from a savings account.

You won’t earn interest on your savings if you use them to offset your mortgage.  

You still have access to your savings. 

If you draw from the savings you’re using to offset your mortgage, your monthly payments could increase. 

You can link an ISA to your offset mortgage. 

There can be higher interest rates with an offset mortgage. 

You can choose to increase your monthly payments and pay off your mortgage quicker.

If you draw from the savings you’re using to offset your mortgage, your monthly payments could increase. 

You should get lower monthly payments as the mortgage is offset. 

You may need a bigger deposit for an offset mortgage. Some lenders ask for 25% of the property value. 

You can help someone buy a property with an offset mortgage by offsetting your savings against someone else’s mortgage. 

Your savings account and mortgage will be with the same bank or lender. 

 

There’s not a huge variety of offset mortgages on the market. 

 

Some lenders ask for a minimum amount of savings to open an offset mortgage. 

 

Do I still have access to my savings with an offset mortgage? 

You can still access your savings if you have an offset mortgage. 

But if you draw from your offset savings account your monthly mortgage payments may increase. 

 

Can I pay my mortgage quicker with an offset mortgage? 

You have a couple of options. Because you’re saving on interest you could either keep your payments low, pocket any savings and use them to pay off the mortgage later. 

Or you could raise your monthly payments and pay off your mortgage quicker. 

Before you do this, you should check with your lender as sometimes they charge for early repayments. 

 

What happens if I overpay on my offset mortgage? 

Some offset mortgage deals might let you overpay, but you might end up paying more interest and losing some of your savings. 

As mentioned, a more effective way could be to keep your monthly payments high. 

 

Should I put down a bigger deposit instead of offsetting? 

There are pros and cons to offsetting and putting down a bigger deposit. 

If you have a bigger deposit, you might benefit from lower interest rates on your mortgage. But once you’ve put down the deposit you won’t be able to get it back. 

With an offset mortgage you will have a nest egg for the future when you’ve paid off your mortgage. But if you draw from your savings before then, your monthly payments could increase. 

 

Do the rates differ with an offset mortgage? 

Sometimes offset mortgages can have higher interest rates, which might counteract any savings you might make by offsetting. 

You’ll save more interest if you have a high amount of savings that you can afford not to touch. 

As with any other mortgage rate, the interest can be fixed or variable. 

Fixed means your interest rate won’t change for several years.

Variable means that the interest rate can go up or down according to the lender's standard variable rate or the Bank of England Base rate (the amount of interest lenders pay to loan money).

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