Is an Offset Mortgage a Good Idea?


Offset mortgages allow your savings to reduce the amount of interest you pay by offsetting other accounts against your mortgage balance. 

In this guide, we’ll talk through what an offset mortgage is and whether or not it is a good idea.

What is an offset mortgage?

An offset mortgage is a type of mortgage that is linked to your savings account – the money saved in the account is used to reduce the total balance you pay interest on each month. 

Lenders “take away” the amount in your savings account from how much you owe on your mortgage. You will only pay interest on what’s left. This means you will repay less interest than if you had a repayment mortgage. 

For example, if you have £100,000 in savings and a £200,000 mortgage, an offset mortgage will reduce your debt to £100,000. 

Are offset mortgages a good idea?

Whether an offset mortgage is good for you will really depend on your own personal circumstances. Besides the annual savings, offset mortgages offer customers the choice between paying back the borrowed amount over a shorter period of time or making lower monthly repayments. 

Depending on your total offset savings account, your mortgage term could be cut by months or even years. Alternatively, if you wish to keep to a standard mortgage term, your mortgage payments could be reduced. 

How does an offset mortgage work?

The savings balance is not actually used to repay your mortgage, but instead it “sits” alongside it. It is essentially treated as a provisional over-payment. 

For example, if you have taken out a mortgage at £200,000 at 3% interest and you have £30,000 in savings, by offsetting these savings against the mortgage, you will only actually have to pay £170,000. 

The interest rate on the total mortgage would add up to around £6,000 per year, but if you calculate the interest on the offset amount, it comes to £5,100. This means you would have an annual saving of £900.

What are the different types of offset mortgage? 

There are two types of offset mortgage options which allow you to either:

  • Reduce the term of your mortgage 
  • Reduce your monthly repayments 

Term reduction

With the option for term reductions, your offset savings help you pay your mortgage off earlier. Offsetting won’t have an impact on your monthly mortgage payments, but the interest you save by offsetting your savings means you pay more of the mortgage back each month. 

Your mortgage balance will reduce faster and you may be able to pay off the mortgage quicker too. 

Payment reduction

With this option, offset savings allow you to benefit from lower monthly mortgage repayments, but you won’t pay off your mortgage any faster. The interest you save each month will be used to reduce the amount of your next month’s mortgage payment. This means the more savings you offset, the lower your monthly payments will be. 

As you use your savings to benefit from lower monthly payments, your mortgage balance and remaining mortgage terms will not reduce any quicker than if you were on a traditional mortgage plan. 

Can you offset 100% of a mortgage?

Yes, technically you can offset 100% of your mortgage since there is no limit to what you can offset. If your offset account is 100% of your savings, then you won’t be charged any interest at all. 

The same applies if your savings are higher than your mortgage. If this is the case, it may be worth opening a separate savings account for the extra sum. This is because you will get no benefit from the additional amount in the offset savings account. 

How much can you save with an offset mortgage?

How much an offset mortgage could save you will depend on how much money you have in your offset savings account, as well as how much your actual mortgage is. 

To find out how much you could save with an offset mortgage, it’s a good idea to speak to our expert mortgage advisors at Barlow Irvin. We will be able to assess your individual situation and establish what type of offset mortgage will be best for you. 

Pros and cons of offset mortgages

If you’re keen on saving, then an offset mortgage may be the right option for you. However, there are a variety of different pros and cons that you should be aware of. 

Pros of an offset mortgage:

  • You could save more on your interest than you would earn in a savings account
  • You’ll pay zero tax on the interest you save 
  • You can still make deposits and take out money from your savings account 

Cons of an offset mortgage: 

  • Your savings won’t earn any interest if they are used for an offset mortgage 
  • You may want to use your savings to pay for a bigger deposit instead 
  • Interest rates can be higher with offset mortgages. If you have a larger deposit, you might be able to pay less each month 

How do you know if an offset mortgage is worth it?

To decide whether an offset mortgage is worth it or not, it’s important that you speak to an experienced mortgage advisor to help you determine what is best. 

FAQs about Offset Mortgages

Can you overpay an offset mortgage?

Yes, you can overpay an offset mortgage every month or from time to time, and the extra credit can be used to reduce your payments at a later date. 

Can you get an offset mortgage if you’re self-employed?

Yes, it is possible to get an offset mortgage if you’re self employed or a sole trader. This option however will be typically available through a specialist lender. 

Different lenders will have different affordability criteria, which is why it’s a great idea to talk to an experienced mortgage advisor who will talk you through the process of applying for an offset mortgage and find a specialist lender. 

Can you withdraw money from an offset account?

Yes, like a regular savings account, you can withdraw money that is accessible from the savings account linked to your offset mortgage account. However, if you do make a withdrawal, you’ll have less money working to lower the interest charged on your home loan. 

Can you take out an offset mortgage for a buy-to-let property?

Yes, you can take out an offset mortgage for a buy-to-let property. However, you will again need the assistance of a mortgage advisor who will find a specialist lender, since offset buy to let mortgages can become slightly complicated.

About the author 

Gary Oxborough

Gary is the Founder and Director of Barlow Irvin Financial Services Ltd. He has been in the Finance industry for over 20 years and has specialised in Mortgages since 2003. As well as running the firm, he is still actively involved in advising clients.

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