What is an offset mortgage and how does one work?

fa-homebuyers ["Mortgages Explained"]
Couple in nature
An offset mortgage links a savings account to your mortgage. How much you have in your linked savings account will affect how much interest you pay on your mortgage. The more you’ve saved, the less you will pay.

How does an offset mortgage work?

An offset mortgage is a way of linking your mortgage with your savings. You pay your savings into a special offset savings account. Once paid in, your savings won’t earn any interest.

Instead, you can use your savings to reduce how much interest you pay. Your lender will take off the amount you have in the linked savings account first when they’re working out how much interest to charge you.

Offset mortgage example

You have £100,000 left of your offset mortgage to pay off
There is £30,000 in your linked offset savings account
You will only pay interest on £70,000 of your mortgage.
If you keep paying into your linked offset savings account, the amount you repay each month on your mortgage will continue to go down. This is because the amount you pay interest on will go down.

What if I don't have a lot of savings?

Some lenders may allow family or friends to use their savings in an offset account. Check the rules of the mortgage lenders you go for.

What are your offset mortgage options?

If you want an offset mortgage, you have a few options:
Fixed-rate mortgage – your interest rate stays the same for a set period. 
Variable rate mortgage – your interest rate can go up or down.
YBS only offer fixed-rate offset mortgages.

Benefits of offset mortgages

Choose to reduce your monthly payments
You may be able to make overpayments if you are not in a fixed period
You could pay off your mortgage earlier if you are not in a fixed period
Because you don’t earn interest, you won’t have to pay tax on it.

Considerations of offset mortgages

You won’t earn interest on your savings
If you need to make withdrawals from your savings, your mortgage payments may go up
Some lenders may have a limit on how much you can keep in the linked savings account
You may earn more in interest than you save if you put your money into a savings account
The interest rate on an offset mortgage is likely to be higher than on a standard mortgage.
The content on this page is for reference and is not financial advice.
For impartial financial advice, try MoneyHelper.