What is an offset mortgage?

Use your savings to reduce the amount of interest you pay with an offset mortgage.

What is an offset mortgage?

An offset mortgage is a type of mortgage that is linked to one of your savings accounts. 

The money in your savings isn’t used to pay off your mortgage. Instead, it’s used to lower the total interest you’ll be charged on your repayments each month.

Even though it could make your mortgage repayments cheaper, you won’t earn any interest on those savings your mortgage is ‘offset’ against. 

How does an offset mortgage work?

Offset mortgages work by ‘offsetting’ the amount of money you need to repay on your mortgage against what you have in a savings account.

Lenders ‘take away’ the amount in your savings account from how much you owe on your mortgage. You’ll only pay interest on what’s left. This means you will pay less interest than if you had a repayment mortgage.  

How does this work?

You have a mortgage of £200,000.

You also have a savings account that contains £20,000.

With an offset mortgage, you would only pay interest on £180,000 of your mortgage, instead of the full £200,000.

This means that you could make a 10% saving on the amount of interest you’d pay back on your mortgage. 

What does this mean for my monthly repayments?

Offset mortgages could mean you make lower monthly repayments. This is because you will pay less interest on what you borrow.

If you want to pay off your mortgage quicker, a shorter term will mean bigger repayments or a higher interest rate. With lower payments, you’ll be on a mortgage term for longer. 

Can I still deposit and withdraw from my savings?

You might still be able to add and take money out of the savings account you use with an offset mortgage. 

The more money you take out of your savings account, the less you’ll save on your mortgage interest. On the other hand, if you keep topping up your savings, you’ll reduce your interest rate. 

Can I overpay or repay my offset mortgage?

Many lenders will let you overpay a certain amount each year on your offset mortgage. 

You can usually overpay by up to 10% a year. Make sure you check any limits on overpayments. Paying more than you are allowed could mean you have to pay an early repayment charge.  

Pros and cons of an offset mortgage

If you’re a diligent saver, you may be thinking about an offset mortgage. But they might not always work out cheaper overall if you have lots of money saved up. This will depend on your situation and how you’d like to pay off your mortgage. 

Advantages of offset mortgages

  • You could save more on your interest than you would earn in a savings account.
  • You’ll pay zero tax on the interest you save. 
  • You can still make deposits and take out money from your savings account. 

Disadvantages of offset mortgages

  • Your savings won’t earn any interest if they are used for an offset mortgage.
  • You may want to use your savings to pay for a bigger deposit instead. 
  • Interest rates can be higher with offset mortgages. If you have a bigger deposit, you might be able to pay less each month. 

The content on this page is for reference and does not constitute financial advice. For impartial financial advice, we recommend government bodies like the Money Advice Service.

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Mortgage essentials
First Time Buyers
Mortgage deposits explained
What is a repayment mortgage?

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