Offset mortgages

Not all lenders have offset mortgage deals available, in fact, they are fairly hard to come by.

Of the major high street lenders there is a NatWest offset mortgage available, and Barclays also offer one, but the majority are offered by building societies.

Yes, this is the main benefit of using an offset mortgage instead of using your savings to pay down the mortgage debt quicker.

However, depending on who your offset mortgage is with, withdrawing your money may take longer and you may not enjoy instant access as you would with a current account. Some lenders also have a maximum number of withdrawals allowed in a particular period.

Don’t forget that if you withdraw your savings, your interest payments will increase as the offset savings balance reduces. Equally, you can add to your savings, increasing the interest savings even further.

You’ll pay the standard costs that come with any mortgage, such as arrangement fees, legal fees and valuation fees.

The arrangement fee may be higher than other mortgage products, but usually lenders put offset interest rates slightly higher instead.

Types of Offset Mortgages  

There are different offset mortgages available, depending on the type of account you want to link:

• Savings account offset mortgages  - Usually the preferred offset mortgage, this links your savings account(s) to your mortgage account and just the savings balance is offset against the interest you pay  

• Current account mortgages - where you have a combined account for your mortgage, savings, and current account activity and the overall balance is used to reduce the interest you pay.

• Family offset mortgages - family members link their savings accounts to your mortgage and the combined balance of any linked savings offset your mortgage interest. This can be very beneficial for first-time buyers, especially if a couple both has family members willing to link accounts

Most lenders offer the above products on both fixed-rate mortgages and variable rate mortgages.

Yes, there are lenders that offer offset mortgages for buy-to-let properties. However, some providers limit offsetting to residential mortgages, so do your research carefully.

It depends on the mortgage provider, but most let you offset up to 100% of the value of the mortgage.

Don’t forget, the account doesn’t earn any interest, so if you have more in offset savings than the outstanding amount owed on your loan, you are likely to be better off moving the spare cash to an interest-paying vehicle.

This will depend on the terms and conditions of your mortgage, but most lenders let you overpay about 10% of the remaining mortgage balance each year, without charging an early repayment fee. However, if you have an offset mortgage, instead of overpaying you can add to the money in your savings account, reducing your monthly interest charges. At the end of the mortgage deal, you could then use those savings to pay off a chunk of the capital you owe without paying any early repayment fees. This way you reap dual benefits from the same savings balance.

If your savings balance is higher than your mortgage balance, you won't benefit from those savings above the outstanding mortgage balance with an offset mortgage.

As you don't earn any interest on savings that are offset, once your savings cancel out 100% of the interest payable, excess funds are better placed in savings accounts.

You could also consider whether you might want to use the funds to clear your mortgage, bearing in mind any ERCs (early repayment charges) that may apply.

Getting an offset mortgage is most beneficial to those with larger savings and paying a higher rate of tax. Because you don't earn interest in an offset linked savings account, you won't have to pay any income tax on the savings.

Self-employed mortgage borrowers can also potentially use their pre-tax income to reduce mortgage interest using an offset mortgage, as income tax is most often paid in arrears.

Those with lower savings may still benefit from an offset mortgage, but if the annual savings are fairly low, your savings may be put to better use by increasing your deposit to lower your LTV. Lower LTV mortgages typically have access to better interest rates.

This depends on your circumstances and the interest rates available to you. In some circumstances it would be more beneficial to provide a larger deposit to access the best interest rates available.

You could potentially still shorten your term to pay less interest overall than you would otherwise.

A broker will be able to help you compare the best offset mortgages against the best non-offset rates based on the deposit you have available.