Offset mortgages explained

Read our guide for more on the pros and cons of using savings to reduce interest paid on a mortgage

gocompare author
Updated 12 October 2021  | 2 min read

Key points

  • An offset mortgage account won't earn interest, but will reduce the interest paid on a mortgage balance
  • You may need significant savings to make offsetting worthwhile
  • Deposits, interest rates, and fees tend to be higher than on other mortgages

Paying off your mortgage can feel like a burden, especially with the interest rate charged on top of your monthly repayments.

One way to reduce the interest you're charged is to get an offset mortgage. If you've got a significant amount in your savings account, taking out an offset mortgage will bring down the total interest payable.

It will also allow you to build your savings as you repay your mortgage.

What is an offset mortgage?

An offset mortgage links your savings to your mortgage and 'offsets' the value of your savings against your mortgage.

In practice, this means you'll pay less interest on your mortgage. However, it also means your actual savings won't earn any interest.

For example, if you take a mortgage for £150,000 but you have £30,000 of savings, taking out an offset mortgage would mean you were only charged interest on £120,000 of the mortgage.

The higher the amount you have in your savings, the less interest you'll pay on your mortgage.

Be careful though – if you have to withdraw anything from your savings, your mortgage will then take longer to pay off.

Of course, the reverse is also true: adding to your savings means increasingly less interest to repay as well.

However, offset mortgages tend to come with higher fees and a higher rate of interest than standard mortgages, so you’ll need to take these into account too.

Who’s an offset mortgage for?

An offset mortgage would most ideally suit buyers with large savings and those who pay a higher rate of tax.

Income tax would usually be payable on savings interest, but because you don't earn any interest in an offset mortgage, there's no tax to pay.

In this way, an offset mortgage can also be worthwhile for those in a lower tax band because they'll receive some tax relief.

This type of mortgage can even work for the self-employed, as they can make the most of the money they put aside for tax before they have to hand it over.

Family offset mortgage

Depending on your provider, your family may be allowed to help you out by linking their own savings accounts to yours.

This would boost the amount of savings, and so reduce the interest even further.

Advantages of offset mortgages

Some advantages of an offset mortgage mean you:

  • Still have access to your savings
  • Can keep adding to the savings account, which will help reduce your debt
  • Don’t pay income tax on the interest you earn on your savings
  • Can link your current account or even a cash ISA to the mortgage
  • Can reduce the debt quicker if some generous family members are willing to link their savings account to the mortgage too
  • Are able to overpay as often as you can afford to, or underpay or take a payment holiday if you’re struggling
  • Convenience of having an offset mortgage with the same lender you have a savings account with

As Matt Sanders, GoCompare's money expert, says: "Offset mortgages have a range of benefits that make them very useful to consumers. They're tax-efficient, they're flexible, and if you've got the savings, they're a great way of paying off your debt more quickly."

Disadvantages of offset mortgages

Offset mortgages have a few disadvantages, such as:

  • If you remove money from your savings, the mortgage will take longer to repay
  • Your savings and mortgage have to be with the same provider
  • Removing money from your ISA to offset against your mortgage means your savings will lose their tax-free status, unless you find a provider offering an ISA-linked offset mortgage
  • You might need a high deposit of at least 25% – not ideal if you’d struggle to save for a deposit
  • You need a significant amount of savings to make the interest rate decrease worthwhile

This shouldn't limit you too much from shopping around though. You can have a current account separate to your savings with the mortgage provider.

Offset mortgage with an ISA

If you've got an ISA as well as a savings account, you might be able to link it to your mortgage account.

Be warned though: if you're offsetting your ISA balance you won't be earning any interest on it, meaning its tax-free status is irrelevant.

However, you can only save a certain amount a year into a Cash ISA.

So, if you continue to build your ISA balance each year while it's being used to offset your mortgage, you'll eventually be able to transfer a large lump sum to a normal ISA account where it'll earn interest tax-free.

Best offset mortgage

We can't tell you what the best offset mortgage would be as it depends on your needs and affordability.

It’s important you compare offset mortgages (and other types) to find the right one for your circumstances.

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