Pros and cons
Lower monthly payments
Pay off mortgage quicker
You can withdraw money
No tax on money you save
Higher interest rates
Need large savings balance
Savings earn no interest
Savings will not grow
How do they work?
Offset mortgages are linked to your savings account to let you reduce how much interest you are charged.
Your savings are not used to pay off your mortgage. Instead they sit in a separate savings account that pays no interest.
Lenders deduct this amount from your mortgage balance and only charge you interest on the remaining amount.
For example, if you have a mortgage balance of £150,000 and £20,000 in savings, you will only be charged interest on £130,000.
Can you withdraw from your savings?
Yes, most offset accounts let you take money out of the linked savings account or pay into it at any point.
If you take money out, you will begin to pay more interest on the mortgage
If you pay more in you will reduce the interest you pay
Most lenders also let you make overpayments on the mortgage, which also reduces the amount of interest you are charged.
However, paying into your mortgage usually means you can no longer access that money. If you paid it into the linked savings account instead, you could reduce the interest you pay but be able to withdraw it again later if needed.
What types can you get?
You can usually pick the benefit you get from offsetting your savings against your mortgage balance. You can choose one of the following:
Lower repayments each month, which saves you money in the short term.
A shorter term but the same repayment amount. This pays off your mortgage quicker, which means you pay less interest and less overall to clear the balance.
Repayments that go down every year, assuming the interest rate stays the same.
Current account mortgages
You can combine your current account with your mortgage instead of holding separate savings and mortgage accounts.
Your mortgage is held in an account with a negative balance that you can pay your wages and savings into. You can spend the money you pay in, but while it is in your account it will reduce the balance you are charged interest on.
Family offset mortgages
Some lenders let you link your friends' or family's savings accounts to your mortgage as well. Their savings will earn no interest, but they will reduce the interest on your mortgage.
They can withdraw their savings whenever they want. This means a family member or friend can help make your mortgage cheaper without having to give you any money.
How much could you save?
On a £100,000 mortgage with an interest rate of 4%, you would pay £528 per month over a term of 25 years.
If you put £15,000 savings in an account linked to an offset mortgage instead, you could pay:
£479 per month over a 25 year term (saving £588 per year)
£580 per month over a term of 18 years and 11 months (clearing the mortgage six years and one month faster)
Mortgage rates are usually much higher than savings rates, so the savings you can make on mortgage interest are higher than the return you could get from a savings account.
If you put the £15,000 in a normal savings account with 1.5% interest instead, you would only make £225 gross each year, which is much less than the £588 an offset mortgage could save you.
Interest on your savings is taxed once you earn more than a certain amount.
However, the money you can save with an offset mortgage is not taxed, so it could be more tax efficient than using a normal savings account.
Offset mortgages are even more tax efficient for higher rate and additional rate taxpayers because they would pay more tax on their savings interest.
How to get an offset mortgage
Not all lenders offer offset mortgages, but you can compare every one available in the UK using our comparison.
Once you have found the mortgage you want, you can apply directly through the lender.
Are you better off with a normal mortgage?
Interest rates on offset mortgages are sometimes higher, so check if you could save more by getting a cheaper normal mortgage and a savings account.
You can calculate your monthly repayment and how much you could save. Enter your mortgage balance and term, savings balance and interest rate into an offset mortgage calculator.
Compare this to the amount you would pay on a normal mortgage and the interest you could get on your savings balance.