Offset Mortgage

Top offset mortgage advice from one of the London’s leading mortgage brokers in Canary Wharf.

What is an offset mortgage?

An offset mortgage enables you to use your savings to reduce your mortgage interest rate and the overall cost.

With an offset mortgage, you can combine a savings account with your mortgage. This means that the money you have in your savings account can be offset against your mortgage; making your money work harder by reducing the mortgage balance that you pay interest on.

How do offset mortgages work?

An offset mortgage does not affect the value of your savings. Instead they are placed in an interest-free savings account and their value is offset against your mortgage.

For example, if you have £30,000 in savings, and a mortgage worth £160,000, you will only pay interest on the remaining £130,000.

Assuming an interest rate of 5%, this reduces your payments from £8,000 to £6,500 – a saving of £1,500.

However, because your savings are no longer earning interest, you’ll need to factor this in to the total amount saved. So, if you were earning 1.5% interest on that £30,000, i.e. £450 a year, the total amount saved on your mortgage will be £1050.

This could potentially save you thousands of pounds in interest payments and you can benefit from this in one of two ways.

  Reduced terms: paying off your mortgage early. or:

  Reduced monthly payment: reducing your monthly mortgage payments.

Option 1: Reduced Term

If you choose a Reduced Term offset, your monthly mortgage repayments stay the same each month (subject to changes in mortgage rates), while the amount of mortgage interest you pay is lower due to your offset savings. More of your monthly mortgage payment is therefore used to repay the balance of your loan which means you are effectively making mortgage overpayments each month. This could allow you to pay off your mortgage sooner (reduced term) and save thousands of pounds in interest. How much sooner you pay off your mortgage is up to you. The more money you have in your Offset Saver Account the less interest you will be charged on your mortgage.

Option 2: Reduced Monthly Payment

If you choose reduced monthly payments, the term of your mortgage remains unchanged, but your monthly mortgage payment is reduced. This is because the offset benefit you earn each month from the savings in your Offset Saver Account is used to reduce the mortgage interest payment the following month.

This could allow your savings to give you more disposable income each month. In addition to reducing your monthly payment, you could also save thousands of pounds during the term of your mortgage.

We collect your mortgage one month in arrears, so it’s important to remember the savings balance in one month will reduce the mortgage payment you make two months later.  For example, the offset benefit gained in April would reduce your mortgage payment for May, which would be collected on 1 June.

What are the advantages of offset mortgages?

• In most cases you can still access your savings account, making your finances more flexible
• You could also overpay each month, which means you pay the mortgage off sooner
• Some offset mortgages allow you to use your current account as well as your savings account
• Offset mortgages have tax benefits. Because your savings are working to pay off your mortgage instead of accruing interest, they will no longer be taxed – even though they save you money every month
• It can be a good way to help a family member get on the property ladder, as some lenders will allow you to offset your savings against someone else’s mortgage

What are the disadvantages of offset mortgages?

Some of the possible disadvantages of an offset mortgage include:

• Offset mortgages might be more expensive than other options depending on the value of your savings.
• You will not earn interest on your savings and/or current account.

Offset mortgage rates

As with standard mortgages, you can get both fixed and standard variable interest (SVR) rate offset mortgages.

Fixed-rate deals usually offer a better deal than SVR mortgages and can last for two, three, five or ten years before moving you onto the lender’s SVR, but a few can be fixed for the whole mortgage term.

Can I get a buy-to-let offset mortgage?

Some lenders will offer an offset mortgage on a buy-to-let property. Since 2017, changes in the law have meant that landlords can no longer deduct interest payments from their tax bills. Offset mortgages may be a good option if you have a buy-to-let mortgage and want to reduce your costs.

Can I get an offset remortgage?

If you already have a mortgage and want to switch to an offset mortgage deal, it is possible to remortgage. Bear in mind that you may have to pay early repayment fees if you leave your current mortgage early.