Offset mortgages are a unique mortgage product that allows you to lower the amount of interest you pay on your mortgage. You’ll need to have some savings to offset against your mortgage loan, and ideally, this will be money that you won’t need any time soon. As mortgage rates have increased considerably since a few years ago, you may be worried about how you’ll afford the higher repayments, especially if you’re coming up to the end of a fixed rate mortgage or you’re on a variable rate. We can look at various options, such as overpaying your mortgage, extending your mortgage term, switching to a new lender, or switching to an offset mortgage. Which approach is right for you depends on your circumstances, so talk to one of our friendly advisors for free to figure out your next steps. In this guide, we’ll explain everything you need to know about offset mortgages, including how they work, how much you could save, their benefits and drawbacks, and how they compare against overpaying your mortgage or investing your savings.
What are Offset Mortgages and How Do They Work?
An offset mortgage is a mortgage that is directly linked to a savings account. The money in your savings account is then ‘offset’ against your mortgage to reduce the total balance you pay interest on each month. In other words, you can use your savings to reduce the cost of your mortgage which can lead to considerable savings over the long term. In some ways, it’s similar to using your savings to overpay your mortgage, except with an offset mortgage you’ll still have access to your savings to spend on other things. However, if you spend a considerable amount of your savings this will negate most of the benefit of these products, so it’s recommended you don’t draw from your offset savings unless you really need to.
Here’s how an offset mortgage works in a bit more detail:
- You speak to a mortgage broker to work out if an offset mortgage is the right choice and to see what deals are available to you
- You take out a mortgage with an offset mortgage provider
- You open a linked savings account (usually with the same provider)
- You transfer all or some of your savings into the linked savings account
- The amount of money in your linked savings account is “offset” against your mortgage balance. This means that you will only pay interest on the difference between your mortgage balance and the balance in your linked savings account
For example, if your mortgage balance is £100,000 and you have £50,000 in your linked savings account, you’ll only pay interest on £50,000 (i.e. you’ll only pay half the amount of interest).
The example above is for a ‘payment reduction offset mortgage’, which tend to be more popular at the moment due to the relatively high interest rates. However, if you can comfortably afford your full repayments, you may want to consider a ‘term reduction offset mortgage’, where your savings are used to reduce the length of your mortgage instead of your monthly repayments. You can also switch between these types of offset mortgages at different times of your life depending on your circumstances and goals.
Where Can I Get an Offset Mortgage?
There are a number of lenders in the UK that offer offset mortgages. The first thing to do is speak to a mortgage broker to see whether these products are right for you and what deals are available to you. Your advisor will then be able to recommend the right lender based on your circumstances. As with any mortgage, being rejected can damage your credit score, so it’s important you seek professional advice before approaching lenders for an offset mortgage.
How Much Can I Borrow with an Offset Mortgage?
The amount you can borrow with an offset mortgage will depend on a number of factors, including your income, your credit score, the size of your deposit, and the interest rates available to you. You should be able to borrow at least as much with an offset mortgage as you would with a regular mortgage, and in many cases, you may be able to borrow more. However, it’s important to note that the amount you can borrow with an offset mortgage will also depend on the lender’s criteria. Some lenders may have a maximum Loan to Value (LTV) ratio for offset mortgages, which means that you can only borrow a certain percentage of the value of the property. To get a more accurate idea of how much you can borrow with an offset mortgage, talk to one of our advisors today.
How Much Can I Save With an Offset Mortgage?
The amount you can save with an offset mortgage will depend on the amount of money you keep in your linked savings account, the interest rate on your mortgage, and the length of your mortgage term. In general, especially when mortgage rates are high, you can save a considerable amount of interest over the long term. For example, if your interest rate was 5% and you had £40,000 in your savings account, you could expect to save around £150 per month on your mortgage*. One thing to note, however, is that this calculation does not take into account any potential interest you could generate if you invested your savings elsewhere. We’ll discuss this aspect in more detail a bit later.
How Much Deposit Do I Need for an Offset Mortgage?
As mentioned, some providers work with lower Loan to Value ratios for offset mortgages, meaning you may need to save a larger deposit for this type of product. Typically, you’ll need at least a 20-25% deposit for an offset mortgage, but some lenders may accept a smaller deposit in some circumstances.
Is it Better to Overpay or Offset My Mortgage?
Whether it’s better to overpay your current mortgage or switch to an offset mortgage will depend on several factors. Both strategies allow you to use surplus money to reduce the cost or length of your mortgage, but their approach is a bit different. The main benefit of overpaying is that you won’t need to switch to a new product, so if you’re still many years from the end of a fixed rate period, this may be the sensible option. However, there are benefits to offsetting rather than overpaying your mortgage as well. One is that you’ll still have access to your savings if you ever need them, whereas, you’ll lose access to any money you use to overpay your mortgage. Depending on how much money you have to spare, offsetting may also allow you to reduce your mortgage more than overpaying because most lenders still only allow you to overpay by 10% each year (some lenders currently allow 20%) without being subject to early repayment charges. If you’re undecided about whether to overpay or offset your mortgage, we recommend speaking to one of our friendly advisors here.
The Benefits and Drawbacks of an Offset Mortgage
Offset mortgages can be a good option for people who have a large amount of savings and who are looking to reduce their mortgage payments or term. However, these products may not be the right choice for everyone, so let’s have a look at the benefits and drawbacks of offset mortgages:
Benefits of Offset Mortgages
- You can reduce your monthly repayments
- You can pay off your mortgage sooner
- There are no early repayment charges
- You can still access your savings if you need to
- The money you save is not subject to tax
Drawbacks of Offset Mortgages
- You won’t earn interest on your savings (but you will still save money)
- You may have to switch to a new product and be accepted by the lender
- You may have a more limited choice of lenders compared to a regular mortgage
- If you use some of your savings, the benefit of your offset mortgage will be reduced
Whether or not an offset mortgage is suitable for you will depend on your individual circumstances. It’s important to speak to one of our advisors to get more information and to see if these products are the right option for you.
How a Mortgage Broker Can Help You Decide Whether an Offset Mortgage is Right For You
Our experienced mortgage brokers understand the nuances involved with all different types of mortgages and we’re familiar with the criteria of all lenders. We’ll ask you about your financial situation, mortgage goals, and risk tolerance, and then use this information to assess whether an offset mortgage is a good fit for you. We can also explain how much you’ll be able to save using an offset mortgage and talk you through other options for reducing your monthly repayments or mortgage term as well. Once you’ve decided which approach(es) you want to go with, we can then compare deals from across the market to see what rates are available to you and arrange your mortgage on your behalf. And as we understand the criteria of each lender, we’re able to recommend products you’re likely to be accepted for to protect your credit score.
The Bottom Line
If you’re wondering how to save money on your mortgage or reduce the term, an offset mortgage may be suitable. You’ll need to have some savings that you don’t plan on using any time soon, which can be offset against your mortgage. For example, if you have a £100k mortgage and you offset £30k savings, you’ll only pay interest on the remaining £70k. There are other things to consider, such as how else you could utilise your savings and what other options are available to you for reducing the cost or length of your mortgage. To find out more and to see whether an offset mortgage is right for you please book an appointment today.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will
depend on your circumstances but will be agreed with you before
proceeding.
* This is an estimation. Exactly how much you’ll be able to save with an offset mortgage will depend on your specific circumstances and the time of your application. Please speak to a mortgage broker for a more accurate figure.
There are additional stamp duty costs involved with property development. It is advisable to speak with an accountant and/or tax advisor to clarify your tax position before proceeding.
