What is an Offset Mortgage?

The world of mortgages can be complex. From fixed rate to interest only and from variable to first-time buyer. It’s a minefield that requires careful navigation. Add offset mortgages to the mix, and it can not only be complicated but also confusing trying to find the right mortgage.

So, what is an offset mortgage, and would you be better off with or without one?

In simple terms, an offset mortgage is where you link your savings account and current account balance to your mortgage and pay interest on the difference between those accounts and the balance of your mortgage. The more you have saved, the less interest you’ll be paying on the mortgage.

Sound confusing? Let’s guide you through it so you know if offset mortgages are the option for you.

How does an offset mortgage work?

An offset mortgage works by taking your current account balance, your savings account balance, and your mortgage balance. It combines the two account balances, deducts them from your mortgage total, and leaves you with a lower mortgage balance for interest to be applied to.

You’ll still make your regular mortgage repayments based on the full mortgage balance, but as there is less accruing interest, you’ll clear your mortgage sooner.

Example:

You have £2,000 in your current account.

You have £12,000 in your savings account.

Your mortgage balance is £150,000.

Interest only accrues on £136,000 of your mortgage.

Are all lenders offset mortgage providers?

No. An offset mortgage is a more niche product. This means that your offset mortgage providers are often more limited in number than those offering more regular mortgages.

You’ll most often find them available via building societies rather than banks, and you may even find they have differing names, which can often be confusing.

Are offset mortgages fixed rate or variable?

Depending on your lender, you might find that either option is available. Some lenders may only offer a fixed rate where your interest stays set at the same rate for the duration. Others may only offer variable rates where your interest can go either up or down.

Speak to a lender or mortgage broker in advance to get additional guidance. Sometimes fixed rates can be more beneficial, but at times a variable rate mortgage may work out better.

What are the benefits of an offset mortgage?

An offset mortgage can be beneficial to many homeowners. However, it can also come with some downsides that make it less appealing. We’ll look at the benefits first.

• You could pay off your mortgage faster.
• You might be able to make overpayments.
• You could reduce your monthly payments if you wish.
• You pay zero tax on the interest you save.

As you can see, you can set yourself on the pathway to clearing a substantial debt by taking out an offset mortgage, but as we said at the start of this section, there can be some downsides that may make an offset mortgage a little more unattractive.

What are the disadvantages of an offset mortgage?

As with anything that has advantages, you’ll often find disadvantages too. With offset mortgages, it is no different. Disadvantages of an offset mortgage include:

• You don’t earn interest on the savings account.
• Should you withdraw money from the savings account, your mortgage payments may rise.
• Linked savings accounts are often capped with a savings maximum.
• The interest rate on the offset mortgage is often higher than a more standard mortgage.

Can you make overpayments on an offset mortgage?

In many cases you can, but it comes down to the lender's terms and conditions. Most cap overpayments at 10%, however, this can vary. You should always check with your lender in advance, as if you pay more than the allowable amount, you may be hit with an early repayment charge.

How is interest worked out on an offset mortgage?

Your lender will work out the interest daily. They will look at what you owe and compare it to what you have in your savings account. The interest will then be calculated on the difference between the two.

A daily calculation of interest can sound daunting, but let’s give you an example:

You owe £100,000 on your mortgage.

You have £50,000 in savings.

You suddenly have an unexpected expense of £20,000 to cover.

Your savings balance is now at £30,000.

You replace that £20,000 within 5 days.

Interest will be applied to £70,000 of your mortgage for those 5 days before returning to £50,000 when you top the savings back up.

Can I combine an offset mortgage with a regular mortgage?

If you need a large sum to obtain your property, it might be possible to take advantage of a multi-part mortgage. This is where you can fully offset part of the mortgage and then use a different mortgage product for the rest.

Let’s say you are looking at a home that needs a £600,000 mortgage. You’ve got £50,000 saved. You might be able to take a fully offset mortgage for the £50,000 fully offset and then take a regular mortgage for the remaining £550,000.

You’ll need to speak with a lender, as not all lenders offer this combination of products.

Is an offset mortgage worth it?

It can be, but as you’ve seen, there are both advantages and disadvantages. You could clear your mortgage faster, but you might have higher interest rates to contend with. That being said, the more you have saved, the less interest you’ll be paying, leading to an overall saving.

You’ll also need a fairly large sum saved to get the benefit of an offset mortgage. Having just £1,000 saved is unlikely to see you secure an offset mortgage or see any substantial benefit.

It can be hard saving up to help secure a mortgage; however, selling to a cash house buyer can see funds hit your account in as little as seven days. You can then put those funds towards a new property right away. With Bettermove, we know that time is of the essence when it comes to securing those better mortgage deals, so we guarantee you will sell your house fast. In fact, you remain in control and decide when and how you sell your home. We present two fast ways to sell; you simply choose which one aligns with your needs the most, and then we’ll do the rest. What’s more, we do it without charging you a penny either!