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Mortgage types

Understanding offset mortgages

When choosing the most suitable mortgage deal for you, assessing all options open to you is a prudent move.

Offset mortgages are a popular choice and in this guide, we’ll look at what they are and how they work, so you can get a feel for whether it’s a potential option you may want to consider.

What is an offset mortgage?

The offset mortgage is growing in popularity. It links your mortgage to your savings account. The value in your savings account is deducted from your mortgage balance, meaning you pay interest on the balance, which reduces your monthly payments.

Typically, this means that the more you have in your savings account, the less interest you’ll pay on your offset mortgage.  

It’s important to be aware though that with an offset mortgage, you won’t earn any interest on your savings.

As most of us pay more interest on a mortgage than we earn from a savings account, an offset mortgage could effectively save you money in the long run.

You can opt for either fixed or variable interest rate offset mortgages.

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Did you know…
 

There were 279,606 mortgage transactions in the first quarter of 2024, totalling over £51.5 billion.

How offset mortgages work

The value of your savings isn’t affected by having an offset mortgage. Your funds are put into an offset savings account with your mortgage lender. The value is used to ‘offset’ against your mortgage.  

So, if you have a mortgage of £200,000 and savings of £50,000, then you only pay interest on the difference of £150,000.

Your interest rate remains the same each month but your savings act as an overpayment, eradicating part of the loan that interest is being charged on monthly. This can help you to pay off your mortgage early.

Repaying the loan faster means it’ll cost you less over the course of the mortgage term.

You can still withdraw money from your savings at any time, though of course, what you take out no longer offsets your mortgage debt.

Family Offset Mortgages

As well as the regular offset mortgages, there are other types available.

A family offset mortgage means parents can help their children buy a property without having to spend anything, just by putting their savings in an account linked to your mortgage with your lender. The capital you owe is reduced. They’ll lose interest on their funds, but they’ll have helped you without needing to dip into their savings.  

Buy to Let offset mortgages are available too. As a landlord, you can choose to pay less monthly to get the most from your rental income. Or you can opt to decrease your loan term and long-term borrowing spend.

Eligibility criteria varies between lenders. In the main, requirements are just the same as with other mortgages, though it’s likely you’ll need to keep your offset savings account with the mortgage lender and have a deposit of no less than 20%.

Some Buy to Let mortgages are not regulated by the financial conduct authority.

Linking savings and mortgage accounts

Some lenders will allow you to link up to six savings accounts to one mortgage. Most will accept various kinds of accounts, including joint accounts, as long as both names are on the mortgage. Typically, all accounts will need to be with your mortgage lender. As well as the more customary savings accounts, you may be able to link the following types:

ISA

There are lenders who will allow you to use your cash ISA if it’s an instant-access account. Generally speaking, neither fixed-term ISAs nor stocks and shares ISAs can be used to offset your mortgage.  

Current account

While not particularly commonplace, current accounts are sometimes able to be used. They are usually called current account mortgages (CAMs). They are a little different to offset mortgages in that the mortgage and current account are put together in one single account.

Self-employed business account

As a sole trader or contractor, if the business account is in your name, you may be able to use it to offset your mortgage, as long as it is with the lender.

Limited Company account

Some specialist lenders provide commercial offset mortgages. This means you may be able to use a Limited Company account for business premises – offsetting the interest on the mortgage.

It’s not possible to use your Limited Company account to do the same if you are buying a residential property, as it is considered legally as a separate entity. Business account funds would either need to be drawn down as a salary, or as dividends, or as a director’s loan – to your personal account.

Commercial mortgages are by referral only.

Pension

It’s much more difficult to link a pension account to offset your mortgage, though if you’re close to retirement age, it is possible. Speak with a qualified, experienced financial adviser to help you navigate this.

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Key benefits of an offset mortgage

The major benefit of having an offset mortgage is that you can reduce the interest you pay over the loan term.

Even low savings can make an impact. By this we mean that you could reduce the duration of your mortgage by approximately seven months if you offset £2,500-worth of savings against a £100,000 mortgage with a 20-year term.

There are lots of other advantages, including:

  • Offset mortgages were designed for flexibility. You are able to make smaller repayments yet still pay off your mortgage over the full term. Some opt to reduce their payments early on while they are adjusting to life with their new home, mortgage and other expenses; with a plan to repay higher amounts, reducing the mortgage duration later, and capitalising on their accommodating mortgage.
  • Your savings that are offset won’t make you any interest, so you won’t have to pay tax. However, you’ll be getting a return from them as you’ll be lowering the mortgage interest you pay.
  • If you opt to link up to six savings accounts, you can really make your money work for you. A financial adviser could be useful here as they could help you navigate the complexities of the process.
  • You can access your savings whenever you need or want to without the need for remortgaging.

Who can benefit most from an offset mortgage?

Offset mortgages are generally more suited to:

  • those with substantial savings
  • self-employed workers with inconsistent income
  • contractors who can benefit from avoiding the 20% or 40% tax on their savings

The impact of offsetting savings on the mortgage balance

By paying the full amount monthly of an offset mortgage you are, in effect, overpaying each month; the result being that you clear your mortgage faster and pay less interest in the long-term.

The role of a mortgage broker in securing an offset mortgage

An experienced mortgage broker can advise you on the details of offset mortgages. It makes sense to discuss your circumstances with someone well-versed in them, due to their complex nature.

On assessing your financial situation and goals, the adviser will be able to help you make an informed decision on whether an offset mortgage will be beneficial for you.

Considerations and potential drawbacks of offset mortgages

There are some potential drawbacks that you should be aware of, including:

  • Typically higher rates than with repayment mortgages
  • It can be more challenging to find a lender which provides offset mortgages
  • A minimum deposit of 20% will likely be required
  • Most lenders will want you to keep your savings account with them, as well as your mortgage
  • While your savings are accessible, dipping into them will reduce the advantages you’ll get
  • Some lenders will require you to keep a minimum amount in your savings account. Lenders may also have a minimum withdrawal – often set at £250.

Are offset mortgages the most suitable choice for you?

Seeking advice is sensible as every case is unique. As a guide, most lenders don’t have a minimum savings requirement, but an offset mortgage will significantly benefit applicants with a high value of savings. They are also particularly beneficial for higher-rate taxpayers looking for tax-efficient ways to lower their mortgage costs. That said, if you’re reliant on the interest you make on your savings or if offset mortgage rates are considerably higher, then this may not be a good option for you.

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FAQs

How much can I offset on my mortgage – is there a limit?

This depends on the lender. Most allow you offset up to 100% of the mortgage value.

What fees will I pay?

You’ll need to pay the usual arrangement, valuation and legal fees that you would with other mortgages.

The arrangement fee might be higher; however, lenders typically raise offset mortgage interest rates slightly instead.

Could I make monthly savings?

Yes, it’s possible with an offset mortgage you could save more in interest repayments than you’d typically make on a savings account.

Additional resources

We have various mortgage resources available:

If you can’t find what you’re looking for, or would like to discuss an offset mortgage, contact our team today.

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