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POSTED 20 September 2018 Mortgages

Offset Mortgage - What is it and How does it Work

What is an offset mortgage? 

An offset mortgage is a flexible alternative to a conventional mortgage that can help homebuyers to save money on the interest they pay on their loan. However, these mortgages are not necessarily for everyone.

How does an offset mortgage work?

When you secure an offset mortgage, you also receive a linked savings account with your lender. You can withdraw money from this account at any time; crucially however, the savings you have in the account don’t receive any interest. Instead, this money is used to offset the interest you pay on your loan.

So, what does this mean in practice?

Well, say you had a mortgage of £150,000 and £20,000 in your linked account. Your savings would be subtracted from your debt, leaving you to pay interest only on the remaining amount – in this example £130,000.

In essence, the more credit you have, the less interest you pay on your debt - and the faster you are able to pay your mortgage off.

offset mortgages 

But with no interest on my savings, won’t I lose money in the long run?

This is an important consideration to make.

In general though, the savings you earn on interest are greater than the interest you’d earn on your savings had you simply left them in a conventional account.

What’s more, the money you save on interest through an offset mortgage is not taxable, unlike the money in a conventional savings account.

Who does an offset mortgage suit?

Buyers who tend to benefit most from an offset mortgage typically have large amounts of savings and are unhappy with the current low rates of interest. Higher tax rate payers (those in the 30% and upwards bracket) can benefit too because this type of mortgage allows them to streamline their tax bill.

Self-employed applicants can benefit from the fact that they are able to use the money that they set aside to pay their tax bill to offset their mortgage. Meanwhile, landlords can have their rental income paid into a linked savings account to offset their own residence.

Parents wanting to help children out with the purchase of a home may also be able to take advantage of an offset mortgage. This is because some lenders allow other family members to link their savings accounts to a mortgage of a relative.

Pros at a glance

  • Shorter mortgage term
  • You can continue to withdraw your savings
  • No tax on the money you save

Cons at a glance

  • Higher interest rates
  • Savings earn no interest
  • A large amount of savings required

Deal or no deal?

An offset mortgage is certainly worth considering if you have sizable savings. Especially if you need access to them from time to time but would like to put your money to good use while interest rates are low.

However, when you weigh up your mortgage options, you should think carefully about whether forfeiting interest on your savings is the right move for you.

If you’re not sure which type of mortgage would best suit you, an online mortgage calculator or, even better, a specialist financial advisor can help to clarify the matter.