How do offset mortgages work?

An offset mortgage is linked to your savings account and could save you money on interest. Here is how they work, who they suit and how much you could save.

Share this guide
Couple looking at tablet in veranda

An offset mortgage is a home loan that is linked to your savings. Your savings balance can effectively ‘reduce’ the mortgage, meaning you are charged interest on a smaller sum. This reduces the interest you pay on the loan, which means you can pay off your mortgage sooner.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Updated 9 February 2021
Lower monthly paymentsHigher interest rates
Pay off mortgage quickerNeed large savings balance
You can withdraw moneySavings earn no interest
No tax on money you saveSavings will not grow

Find the right deal by comparing offset mortgages to check the interest rate and fees

How do offset mortgages work?

Offset mortgages work by keeping your savings and your home loan in the same place.

Your savings are not used to pay off your mortgage. Instead, they sit in a separate savings account that pays no interest. But, the balance of your savings account is effectively added to your offset mortgage account. 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.

The more cash savings you have, the more you will reduce your mortgage balance and the less interest you will pay.

As you are charged less in interest on a mortgage offset account, you will repay the home loan sooner and can save hundreds, or even thousands in interest.

It is also possible to take out an interest only offset mortgage, but this means you will be responsible for paying off the capital when the mortgage term ends.

Offset mortgages: Pros and cons

One of the main advantages of offset mortgages is their flexibility.

Most offset mortgage accounts will let you withdraw money from 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.

Making overpayments on a mortgage usually means you can no longer access that money. However, if you paid that money into the linked savings account of an offset mortgage, you would reduce the interest payable but still be able to withdraw that cash again later if needed.

On the downside, using your savings to offset your mortgage means you won’t earn any interest on your money. However, as savings rates are so dismal at the moment, you are likely to save far more in interest than you would earn by putting your money elsewhere. 

Benefits of offset mortgages

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

Now you’ve answered ‘how does an offset mortgage work?’ you could take the concept one step further, and combine your current account with your mortgage, rather than your savings. 

The main difference between current account mortgages compared to offset mortgages is that instead of having two accounts, your mortgage and current account are merged into one.

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.

However, while current account mortgages can help you pay off your home loan faster, seeing a negative balance all the time can make things a little confusing.

Family offset mortgages

Some lenders let you link your friends' or family's savings accounts to your offset 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 a mortgage offset account 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.

Tax benefits

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 tax works on the interest on your savings

How to get the best offset mortgage

You can compare offset mortgages using our offset mortgage comparison.

Our tables will list the best offset mortgage rates available on the market. Once you have found the mortgage you want, you can apply directly through the lender.

Is an offset mortgage right for me?

Offset mortgage rates are sometimes higher than standard mortgages, 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 and you will be able to decide if an offset mortgage is right for you.

If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.