An offset mortgage works by allowing your savings to balance out your mortgage debt, so you only pay interest on the difference. Monthly mortgage payments are initially calculated on the total debt before accounting for the offset, meaning that each month you end up paying more than needed. This helps you pay off your mortgage faster than with a regular loan, and you don’t pay tax on the interest you would have earned on your savings.
For example, if you have a £100,000 mortgage with an offset tracker loan rate of 5.24% from Intelligent Finance, you could save over £39,000 in interest over the mortgage term by offsetting the loan with £20,000 in savings. This would also allow you to finish paying off the mortgage five years earlier than a standard 25-year mortgage.
About a quarter of mainstream mortgage providers offer offset deals. Some of these are current account mortgages, like the One Account from the Royal Bank of Scotland, which lets you offset savings and current account balances against your mortgage. Together, offset and current account mortgages make up about 10% of the home loans market.
Most offset mortgages have interest rates linked to the Bank of England’s base rate, but there are also fixed or capped rate options available. They offer flexibility, allowing borrowers to pay off the principal without penalties, make lower payments, or even take payment breaks if they’ve made additional payments throughout the year.
However, offset mortgages usually come with higher rates than traditional ones, making the flexible benefits more costly. They might not be the best choice for everyone. In fact, industry data shows they aren’t extremely popular among consumers.
Mortgage broker John Charcol reported that only 1% of borrowers chose an offset loan last month, compared to 20% who selected base rate tracker deals, and 18% who went for low two-year fixed deals.
Mortgage adviser James Cotton from London & Country suggests that for an offset deal to be more cost-effective than a traditional mortgage, higher-rate taxpayers should have at least £10,000 in savings to offset a £100,000 mortgage.
Ray Boulger from Charcol points out that while offset mortgages might not suit everyone, they offer unique features. For example, they allow you to offset multiple savings and current accounts. Some providers even let parents use their savings to offset their children’s mortgage, reducing the monthly payments while still keeping access to their funds.
Mark Pittaccio, a business development manager from Hertfordshire, values the flexibility of offset mortgages. Over the past six years, his offset mortgage has allowed him to renovate a property, buy a car, start a business, and manage his taxes effectively. Although the rates are slightly higher than some competitive two-year deals, he believes the extra benefits are worth the additional cost.