Offsetting your savings against your mortgage can be a useful way to reduce your interest payments. But make sure you wouldn't benefit more by putting your money in a separate savings account with a decent interest rate.
Pros and cons of offset mortgages
Pros:
-
May be higher interest savings than interest saved from a savings account.
-
You still have access to your savings.
-
You'll pay no tax on the interest you save.
-
You can help first-time buyers with an offset mortgage by offsetting your savings against their mortgage.
Cons:
-
There can be higher interest rates with an offset mortgage.
-
You won’t earn interest on your savings if you use them to offset your mortgage.
-
If you draw from the savings you’re using to offset your mortgage, your monthly mortgage interest payments will increase.
-
You may need to save for a bigger deposit for an offset mortgage. Some lenders ask for 25% of the property value.
-
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.
Offset mortgage rates
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 standard mortgages, the interest rate can be fixed or variable.
Fixed means your interest rate won’t change for a set period of time.
Variable means that the interest rate can go up or down according to the lender's standard variable rate (SVR) or the Bank of England Base rate.
The actual mortgage rate you'll be offered depends on the following factors:
- How much you earn
- The size of your deposit
- How much you want to borrow
What our expert says
Offset mortgage FAQs
Is an offset mortgage a good idea?
Whether an offset mortgage is a good idea depends on your personal circumstances.
You generally need a large amount of savings that you can afford to leave untouched. The higher the savings, the more you'll save on interest payments. If you withdraw money from your savings, your interest amount will rise.
Can I pay my mortgage quicker with an offset mortgage?
If you choose to overpay your mortgage (either by increasing your monthly payments or with a lump sum), you may be able to pay it off quicker.
But you should check with your lender before you do this, as there is normally a limit to how much you can overpay before you face early repayment charges (ERCs).
What happens if I overpay on my offset mortgage?
If you choose to overpay on your mortgage, you could benefit from a shorter mortgage term and paying less interest overall. But there are normally limits to how much you can overpay before you face additional charges and you also won't be able to get that money back.
If you would prefer to have your money accessible, you could instead pay more into your savings account to reduce your monthly interest charges. The right decision for you will depend on your individual circumstances.
Is it better to put down a bigger deposit instead of offsetting?
It depends on your personal circumstances. 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 have savings for the future when you’ve paid off your mortgage. But if you withdraw from your savings before then, your monthly payments could increase.
You can speak to our broker partner, Mojo Mortgages, who can help compare the best offset mortgages for you against standard mortgages with the deposit you have.
Can I use an offset mortgage for buy-to-let?
If you're looking for buy-to-let mortgages, there are some lenders who offer offset deals. But the options may be limited and there could be a strict eligibility criteria.
How do offset mortgage work with tax?
Most people pay tax on their savings unless it's an ISA account. For savers with an offset mortgage, the money is tax-free. When you have an offset mortgage, you won't earn any interest on your savings but you'll pay less interest on your mortgage.
More articles
UK Mortgage Statistics 2023
Uncover 2023 UK mortgage statistics. Explore mortgage market size, UK house prices, UK mortgage rates, conveyancing costs and equity release.
First-time buyers statistics: 2023
See the latest stats on first-time buyer demographics and prices, and compare first-time buyer mortgages for the best deals.
Should I rent or buy?
The first step to getting a house is making the decision about whether it's better to rent or buy.
House viewing checklist
Here's some tips to bear in mind when you view property.
What is exchange of contracts?
The final hurdle before the house is officially yours – swap contracts and insure the building.
Getting a mortgage with a gifted deposit
Buying a house is an expensive process. Gifted deposits can help.
Page last reviewed: 11 September 2023
Reviewed by: Claire Flynn
YOU SHOULD THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME/PROPERTY. YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
The Financial Conduct Authority does not regulate mortgages for commercial or investment buy-to-let properties.
Confused.com is not a mortgage intermediary and makes introductions to Mojo Mortgages to provide mortgage solutions.
Confused.com and Mojo Mortgages are part of the same group of companies.Confused.com 2nd Floor, Greyfriars House, Greyfriars Road, Cardiff, CF10 3AL, United Kingdom. Confused.com is a trading name of Inspop.com Limited and is authorised and regulated by the Financial Conduct Authority. FRN 310635
Mojo is a trading style of Life's Great Limited which is registered in England and Wales (06246376). We are authorised and regulated by the Financial Conduct Authority and are on the Financial Services Register (478215). Mojo’s registered office is The Cooperage, 5 Copper Row, London, SE1 2LH, and head office is WeWork No. 1 Spinningfields, Quay Street, Manchester, M3 3JE.
To contact Mojo by phone, please call 0333 123 0012.
cookie usage