Published: 07/12/2018

At a glance

  • Offset the amount you owe on your mortgage against any savings you have.
  • Great for people with moderate to large deposits when the interest rate you get on your savings is much less than the interest being charged on your mortgage.
  • Be aware that your savings will not grow – Very important if you rely on an income from your deposit.

Offset mortgages can be a great way to save money. They can either help you reduce your monthly payments, or shorten the term and help you get mortgage-free sooner.

Unfortunately, as there aren’t many of them, most people may not even know they exist, let alone realise their potential. As a result, homeowners could be missing out on some welcome savings.

How offset mortgages work

Offset mortgages, simply put, let you link your mortgage to your savings. The savings balance is used to reduce the amount of interest charged on the mortgage.

The way this works is by having your savings 'offset' against the value of your mortgage, so you'll only pay interest on your mortgage balance minus your savings balance. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest.

Say, you have a mortgage of £100,000 and you're paying an interest rate of 3.00%. You also have £10,000 in a savings account.

By offsetting your £10,000 savings, you only pay interest on £90,000 of your mortgage. Over the course of the year this can save you up to £300.

If you'd have left these savings in a savings account paying 2.00%, you would have earned £200 in interest. If you have to pay tax on your interest, it would be even less. Plus you'd still have to pay that £300 you didn't save on the mortgage.

With your offset mortgage, you can choose to either lower monthly payments or shorten the length of your mortgage term. The former allows you to reduce your repayments, while the latter keeps your payments the same but gives you the chance to become mortgage-free earlier.

Offset mortgage myth buster

Those that have heard of this type of mortgage deal may have been put off by warnings that it's more expensive or too restrictive. However, the truth is that:

  • You can get at your money quickly – it's not locked away.
  • A small amount of savings can make a big difference – a modest pot of £2,500 could shorten a £100,000 mortgage by seven months over a 25-year term!
  • The mortgage interest rates on these deals are not that much higher. Like any financial product, there are more and less competitive rates, so shop around.

It’s easy to see all the offset mortgages in the market by using the dropdown options under ‘Other refinements’ on our mortgage search pages. You can order these by rate, the more inclusive APRC measure, monthly payments and more.

The benefits of overpaying or saving more

Once your savings are offset against your mortgage, you can still add to them. Unless savings rates elsewhere are too tempting, you might want to consider this, as more money offset means more interest saved.

Some offset mortgages also allow you to overpay. This will have the same effect of saving you interest, but as you’re physically repaying part of your mortgage, you’ll likely won’t be able to get the money back later. Offset savings, on the other hand, remain alongside the mortgage. They don't repay it, so you still have access to your money.

Offset mortgages can help children get on the property ladder

Offset mortgages can offer a great alternative to becoming a guarantor or physically giving your child money towards buying a new home. While there are only a few mortgages, if any, that will allow the parent or guardian to add their savings directly and retain some direct control, it’s entirely possible for you to gift the funds to your child, with the promise of getting them back later – as long as your child doesn’t default on their mortgage payments.

Pros and cons of offset mortgages

  • Save more interest than you earn in a savings account.
  • Pay no tax on the interest you save – You may have to pay tax on interest earned on a normal savings account (apart from cash ISAs).
  • Keep easy access to your savings (Remember your mortgage payment may go up if you make a withdrawal from your savings).
  • Finish your mortgage sooner or make lower monthly payments.
  • Help a child or relative get on the property ladder.
  • Your savings don’t earn interest. So, if you rely on your savings for income offsetting against someone else’s mortgage is not a good idea.
  • Your savings will lose their spending power as they won’t grow.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

Offset mortgages are a terrific way to make your deposit work harder for you if the savings interest rates you are getting are pretty low.

Mortgage calculator

Our mortgage calculator helps you to see how much your mortgage might cost you each month.

Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is only an indication only.

Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.

What next?

Compare the very best mortgage rates to suit your requirements. 

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

dog sitting next to a box being unpacked

At a glance

  • Offset the amount you owe on your mortgage against any savings you have.
  • Great for people with moderate to large deposits when the interest rate you get on your savings is much less than the interest being charged on your mortgage.
  • Be aware that your savings will not grow – Very important if you rely on an income from your deposit.

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