What is an offset mortgage? Here’s what you need to know

Mortgages come in all shapes and sizes. And while you may be familiar with standard repayment or interest-only mortgages, there’s another option that could be worth considering if you’ve got significant savings sitting in the bank. It’s called an offset mortgage and could save you thousands in interest over the life of your loan.  

How do offset mortgages work? 

An offset mortgage is a type of home loan that links your mortgage to your savings account (and sometimes your current account too).  

Rather than earning interest on your savings, the money in these accounts is used to reduce – or 'offset' – the amount of mortgage debt you're charged interest on. 

For example, let's say you have a mortgage of £200,000 and £30,000 in savings. With an offset mortgage, you'd only pay interest on £170,000 (that's £200,000 minus your £30,000 savings).  

Your savings remain accessible, but instead of earning interest on them, they're working to reduce your mortgage interest instead. 

The key thing to remember is that your savings aren't used to pay off your mortgage directly. They're simply linked to it, reducing the amount you're charged interest on each month.  

You can still access your savings whenever you need them, which gives you much more flexibility than if you'd used that money to make a lump sum payment on your mortgage.  

How does an offset mortgage differ from a standard mortgage? 

With a traditional mortgage, your savings and your home loan are completely separate. Your mortgage sits with your lender, accruing interest on the full amount you've borrowed, while your savings might be in a different account (possibly even with a different bank), earning their own interest. 

With an offset mortgage, everything is usually held with the same lender, and your savings actively reduce the interest you pay on your mortgage.  

This can be particularly beneficial because mortgage interest rates are typically higher than the interest rates you'd earn on savings. So, offsetting can often save you more money than you'd earn by keeping your savings separate. 

Another difference is flexibility. Offset mortgages often come with features that let you overpay, underpay, or take payment holidays (subject to lender approval, of course). This can be helpful if your income fluctuates or if you want the option to pay off your mortgage faster when times are good. 

Who might benefit from an offset mortgage? 

Offset mortgages aren't for everyone, but they could be beneficial in certain situations: 

• If you have significant savings: The more money you have, the more you can offset against your mortgage, and the more interest you'll save. If you've only got a small amount stashed away, the benefits might not be as noticeable. 

• If you're a higher-rate taxpayer: Because you're not earning interest on your savings (which would be taxable), you're effectively getting tax-free savings. For higher and additional-rate taxpayers, this can be a real advantage compared to earning taxable interest in a standard savings account. 

• If you like flexibility: Offset mortgages often come with flexible features, making them ideal for people with variable incomes, such as the self-employed or those who work on commission. Being able to access your savings while still benefiting from reduced mortgage interest gives you financial breathing room. 

• If you're saving for something specific: Maybe you're putting money aside for home improvements, a wedding, or university fees for your children. An offset mortgage lets your savings work for you in the meantime, reducing your mortgage costs while keeping the money accessible for when you need it. 

What are the potential drawbacks? 

While offset mortgages have benefits, they're not without their downsides. It's important to weigh up both sides before making a decision. 

• Higher interest rates: Offset mortgages often come with slightly higher interest rates than standard mortgages. You'll need to do the maths to work out whether the interest you save by offsetting is greater than the extra cost of a higher rate. 

• You won't earn interest on your savings: Your savings are being used to reduce your mortgage interest, which means they're not earning interest themselves. If you could get a high interest rate on a savings account, it might be worth comparing whether you'd be better off keeping your mortgage and savings separate. 

• Limited availability: Not all lenders offer offset mortgages, so your choice of products may be more limited. It's worth shopping around and speaking to a mortgage broker to find the best deal. 

How does an offset mortgage affect your credit health? 

An offset mortgage works just like any other mortgage when it comes to your credit report. As long as you make your monthly payments on time and in full, it'll be recorded as positive payment history, which can help build your credit score over time. 

Remember that applying for a mortgage will involve a hard search on your credit report, which can have a temporary impact on your score.  Lenders will want to see that you can manage credit responsibly, so keeping on top of your existing credit commitments is key. And it’s worth checking your credit report first.  

With Checkmyfile, you get the most detailed credit report out there. It puts your info from the UK’s three main credit reference agencies – Experian, Equifax, and TransUnion – in one place. And if you spot something that doesn’t look right, our UK-based customer care team is on hand to help.  

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Is an offset mortgage right for you? 

Ultimately, whether an offset mortgage is a good fit depends on your personal circumstances. If you've got a healthy amount in savings, you're a higher-rate taxpayer, and you value flexibility, it could be beneficial.  

But if you don't have much in savings or you'd rather keep your finances simple, a standard mortgage might suit you better. 

The best thing you can do is run the numbers. And if you're ever unsure, speaking to a qualified mortgage adviser can help you make an informed decision based on your situation.