What is an offset mortgage?

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.

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.

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.

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.

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 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.

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.