If you’ve managed to build up a substantial savings pot over time, an offset mortgage could potentially save you money and shorten your mortgage term, but is this type of mortgage right for you?
An offset mortgage is a mortgage where you keep some or all of your savings in an account that’s linked to your mortgage. You only pay interest on the outstanding balance which can reduce your costs. You won’t earn any interest on your savings, so an offset mortgage is usually only worth considering if you save more in your mortgage payments than you could earn in interest on your savings.
Here, we explain how they work, and where to go for advice if you’re not sure whether an offset deal is right for you.
How offset mortgages work
Offset mortgages work by linking your mortgage and your savings. It means you have to have your savings with the same bank or building society that you have your mortgage with and you have to open a special ‘offset mortgage’ account.
Offset mortgages can:
- Save you money – You don’t earn interest on your savings but they are used to ‘offset’ the amount you owe on your mortgage, so you only pay interest on the balance.
- Shorten your mortgage term – If, for example, you have a £200,000 mortgage and £30,000 in savings, if you continue to pay the amount you would pay on a £200,000 mortgage, you’d reduce your mortgage term without needing to make any extra, one-off payments. Offset mortgages can be a good option for people who want to overpay their mortgage and reduce the term of their loan but who are worried that they may need their savings in the future.
- Be more expensive – Offset mortgage rates can be between 0.1% and 0.5% higher than the best buys standard mortgage rates. This varies from provider to provider.
- Offer less choice – It can be harder to get a fixed rate offset mortgage as there aren’t a huge number of mortgage lenders that offer them.
- Give you access to your savings at any time – With many mortgages you’re able to overpay and borrow back the extra payments you’ve made. But it can be a time-consuming process with no guarantee that you’ll get the money (if for example your property has fallen in value and you have a high loan to value). With an offset mortgage you can dip in and out of your savings as you wish.
Is an offset mortgage right for you?
If you don’t have any savings then an offset mortgage isn’t for you. But if you do have savings, even for only part of the year, perhaps because you’re saving up for a tax bill or you get paid an annual bonus, an offset mortgage could be worth considering.
You don’t need a lot of savings to benefit from an offset mortgage. What’s key is the mortgage rate you’ll be charged. For example, if you’re only going to pay 0.1% more for an offset mortgage compared to a regular deal, it doesn’t really matter if you use the offset facility that much, but if you’re paying an extra 0.5%, you need a lot of savings to make it worthwhile.
It’s worth weighing up whether you might be better off reducing your loan to value (the amount you’ve borrowed relative to the value of your property). If you have some savings that you don’t need (and won’t need in the future), you may save more money by taking out a smaller mortgage than by keeping the savings in an offset account. That’s because mortgage lenders tier their interest rates according to the amount you want to borrow.
It’s best to keep your borrowing below 75% of the property’s value if possible because mortgage lenders tend to scrutinise applications far more carefully at 75% or above. For every 10% of the property’s value that you want to borrow you’ll typically pay around an extra 1% on the mortgage rate.
However, if you decide to reduce your mortgage using your savings, then bear in mind that unlike with an offset mortgage, you won’t be able to get these savings back. It’s vital to always keep a savings buffer in place, especially as living costs are soaring at the moment, so that you have some funds readily available in the event of an emergency.
Where can I get an offset mortgage?
Offset mortgages are only offered by a relatively small number of lenders including Barclays, Coventry Building Society, Accord (the intermediary only arm of Yorkshire Building Society), First Direct, Clydesdale Bank and Scottish Widows Bank. Bear in mind that the mortgage market moves quickly so the lenders that offer offset mortgages may change over time.
Several of these providers have online offset calculators to help you work out whether an offset deal could be right for you, but as a general rule, the more savings you have, the better an offset mortgage is likely to be.
For example, someone with a 10-year £150,000 offset mortgage at a five-year fixed rate of 4.29%, who has £50,000 in savings, could pay off their mortgage in six years and would pay a total of £13,427 in interest, with monthly payments at £1,539. This compares to total interest of £22,665 if they’d chosen a standard mortgage at a lower fixed rate of 3.85%, with monthly payments at £1,508 although if their £50,000 savings had been earning interest at 3%, they’d also have returns of £6,000. These examples don’t include any arrangement fees.
However, if the same person only had £5,000 of savings to offset, they wouldn’t wouldn’t pay their mortgage off any earlier than if they’d opted for a standard mortgage. Their monthly payments at the 4.29% offset rate would again be £1,508 compared to £1,539 for the 3.85% non-offset deal, which would mean overall they’d pay £24,171 in interest with offset deal and £22,665 with the non-offset deal. They would also earn £600 in interest on the £5,000 savings pot, again assuming a rate of 3%.
It’s not always easy to work out which mortgage option is right for you, so if you’re in any doubt, it’s worth speaking to a professional mortgage advisor. You can read more on why this might be a good idea in our guide Should I get advice on my mortgage?