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About Mortgages

With an offset mortgage, you use savings to reduce how much interest you pay. Just choose your type of borrowing above, answer a few quick questions and compare offset mortgages matched to your search.

Think carefully about securing debt against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

Last updated on 07 March 2022.

What is an offset mortgage?

An offset mortgage links your mortgage with a savings account to reduce your loan balance and therefore how much interest you are charged on your mortgage.

So if you have a mortgage of £120,000 and £30,000 in a linked savings account, you would only pay interest on £90,000. If your provider charges 3.5% interest on your mortgage, you would pay £3,150 a year in interest on £90,000, instead of £4,200 on £120,000.

You won’t be using your savings to pay off your mortgage, and it won’t reduce your loan amount. Your savings just help you reduce how much interest you are charged on your mortgage.

You can still access your savings, but if the balance goes up or down, it will have an effect on how much interest you are charged. If you have no money in your offset savings account, you won’t get any offset benefit.

Due to the savings made through offsetting, you will usually have the option of lower monthly payments or keeping payments the same, so you are mortgage-free sooner.

How to choose the best type of offset mortgage for you

When you’re considering offset mortgage providers and terms, check if you meet eligibility requirements, such as your loan-to-value (LTV) ratio. The LTV highlights the size of the mortgage as a percentage of the overall cost of the property, so you can work out the deposit you will pay. With offset mortgages, you may be expected to put down a larger deposit - for example, as much as 25% of the value of the property you are buying or remortgaging.

When comparing lenders’ terms, consider:

  • The monthly repayment amount.
  • The length of the initial deal and the annual rate of interest, as well as the total cost, which is calculated as an annual percentage rate of charge (APRC).
  • If the interest is fixed rate or variable rate for the set period, such as five years. With fixed-rate mortgages you pay the same each month, while the interest rate of a variable rate mortgage can increase and decrease, and your payments will reflect that.
  • The standard variable rate (SVR) you will move on to if you don’t switch to another deal when the deal ends.
  • Extra costs, such as application fees, arrangement fees, product fees and any early repayment charges on overpayments.

The Annual Percentage Rate of Charge, or APRC, listed next to products on our comparison tool, will help you to compare mortgages, as it calculates the costs you will pay, including the interest rate but also any additional fees and charges.

You can offset a repayment mortgage or an interest-only mortgage, depending on the provider.

It’s possible to add offsetting to an existing mortgage when you remortgage, or choose an offset mortgage when you buy a property.

What offset mortgage rates are available?

The initial mortgage rate you’re offered will depend on a few factors, including:

  • the affordability of the loan
  • your credit history
  • the amount you need to borrow
  • the value of the property you’re buying or remortgaging
  • your mortgage term

You may find that interest rates on offset mortgages are higher than standard mortgages. They are not always significantly more, though, and the savings you make from paying less interest might more than make up for this.

Is an offset mortgage right for you?

An offset mortgage is likely to be more suited to you if:

  • You have decent savings that you don’t rely on to supplement your monthly income.
  • Your savings earn you less in interest than you save offsetting them against your mortgage.
  • You don’t rely on interest earned on your savings account.
  • You are a higher-rate or additional-rate taxpayer who pays income tax on savings interest. This is because you won’t earn interest on your linked savings.
  • You want to link your savings to your child’s mortgage with a family offset account without gifting them money.

But whether it is right for you depends on your individual circumstances. Your lender will look at your finances to consider if the mortgage will be affordable for you both now and in the future. They will look at your outgoings and income, along with other factors, including the size of the loan.

Alternatives to an offset mortgage

Another approach to reducing the interest you pay and being mortgage-free sooner is to use overpayments on a standard mortgage, within the lender’s limit.

Most mortgage lenders allow up to 10% overpayment a year without an early repayment charge. This can be as a lump sum or regular amounts.

Offset mortgages often also allow overpayments. But bear in mind that, unlike money in a linked savings account, you won’t have access to the money used for overpayments.

An offset mortgage isn’t for everyone, and there are a few important calculations to make before deciding whether it’s worthwhile for you. For example, if you are buying a home, you may want to consider whether putting more down as a deposit to reduce your mortgage’s LTV (loan to value) ratio would be more beneficial.

As there are a few factors to consider, you might want to speak to a mortgage adviser to help weigh up your options.

The benefits of an offset mortgage

Reasons why an offset mortgage might appeal include:

  • You’ll pay less overall interest on your mortgage, as what you are charged is calculated on the loan minus your linked savings. This could mean significant interest savings over the mortgage term.
  • As you are charged less interest, you can usually choose to pay less each month or pay the same amount each month and pay off your mortgage early.
  • Your linked account won’t earn interest, so there will be no tax to pay on savings’ interest. Instead, your savings will be used to reduce interest charged on your mortgage.
  • You can still access your savings whenever you like if you need to draw on them, though of course, as your balance goes up or down it will affect your mortgage payments.
  • You may be able to offset additional accounts, such as your current account and cash ISA, with some providers allowing as many as six linked accounts.
  • You may also have the option of making overpayments, though, as with a standard mortgage, watch out for early repayment fees if you go over the maximum amount.

The disadvantages of an offset mortgage

You should also be aware of the possible drawbacks of offset mortgages, including:

  • If you withdraw money from your savings account and the balance reduces, what you pay in interest will go up. You may also need to have a minimum balance.
  • Offset mortgage rates may be higher than standard mortgage rates.
  • You may have less choice of providers and deals than with a standard mortgage.
  • You may need a lower LTV ratio than with standard mortgages, with a deposit, or equity of at least 25%.
  • You won’t earn interest on money in your linked savings account.
  • Your linked savings account and mortgage will usually need to be with the same provider.

Offset Mortgages FAQ

How does an offset mortgage work?

If you have an offset mortgage, your savings help reduce how much interest you pay over the term of your mortgage. You will pay interest on your mortgage loan minus your savings amount. For example, if you have a £200,000 mortgage and £40,000 in a linked savings account, you will only pay interest on £160,000.

As your mortgage payments are calculated on the full loan amount, you will effectively be overpaying each month. This means you can usually choose to reduce your monthly payments or keep them the same to reduce your mortgage term, so you are mortgage-free sooner.

Is an offset mortgage worth it?

It won’t suit everyone, but it might be worth considering if you have substantial savings and want to pay off your mortgage early, or pay less each month.

It may also appeal if you would otherwise pay tax on interest that you earn on your savings, as you won’t earn interest on your linked savings. While not earning interest on savings may appear to be a drawback, the interest saved on your mortgage may be greater than you would earn on savings.

But there are lots of factors to consider when choosing a mortgage, and it makes sense to compare how an offset mortgage stacks up against a standard mortgage, including making overpayments to pay off your mortgage sooner.

If you’re buying a home, you may also want to consider if a bigger deposit would make more sense, to reduce your mortgage’s LTV so you can access lower rates.

Using online mortgage calculators and offset mortgage calculators can help you compare the figures, or you can contact a mortgage broker.

If you are unsure about which type of mortgage is best for you, consider using a mortgage adviser.

» MORE: Should you use a mortgage adviser or go direct?

Can I borrow more with an offset mortgage?

Whether you can increase your loan amount will depend on the lender, but some providers will let you borrow more at the same interest rate. There is usually a maximum amount you can borrow based on how much you have left to pay off on your mortgage.

You can take out money from your savings account whenever you like, which may be more straightforward than increasing your loan amount, which would require affordability checks.

Will I pay more for an offset mortgage?

Offset mortgages tend to have slightly higher interest rates than regular mortgages, so you will need to balance this against the savings you might make with this more flexible type of mortgage.

Are offset mortgages quicker to pay off?

They can be, depending on how you use them. If you choose to keep your monthly payments the same, you can shorten your mortgage term due to the interest savings you make with an offset mortgage. As you are paying interest on a lower amount, keeping your payments the same means you are effectively overpaying and will repay the loan quicker.

If you choose to lower your repayments, perhaps so you have more disposable income each month, your mortgage term will stay the same. But you will still make savings on interest through linking your savings account and paying interest on a lower amount.

What’s the difference between offsetting and overpaying?

The main difference is that unlike your offset savings, once you’ve overpaid on a standard mortgage, you can’t dip into those funds unless you are able to remortgage.

Offsetting is linked to your savings, which you can access any time to make deposits and withdrawals. Your savings are not being used to pay off what you owe; they just sit alongside your mortgage to reduce how much interest you pay. If you pay more into your linked savings account, it will reduce how much interest you are charged. But you can withdraw that amount later, at any time.

Overpayments on a standard mortgage, whether as a one-off lump sum or regular payments, are extra payments, which can help clear your debt sooner and reduce how much interest you pay. You’ll need to make sure you don’t exceed any limit set by your provider, so you avoid an early repayment charge. Always check the terms of your mortgage deal, so you’re clear on any penalties.

What fees will I pay with an offset mortgage?

Similar to all mortgages, you may have to pay extra fees, such as an arrangement fee, booking fee, valuation fee and legal fees. You can usually choose to pay these up front or add them to your mortgage balance. Remember that if you add the cost of extra fees to your mortgage, the interest you’re charged will be calculated on a higher loan amount.

If you exceed the maximum amount for overpayments on your mortgage or leave your term deal early, you may be charged an early repayment fee.

Not all fees apply to all products, though, so check carefully before you apply, and bear them in mind when comparing your options.

Can I access my savings with an offset mortgage?

Yes. One of the benefits of an offset mortgage is you can access your linked savings, usually whenever you want to.

However, withdrawing money or paying money in will affect your balance and how much interest you pay. Your provider may ask that you have a minimum and maximum balance in your linked account.

Can I offset mortgage interest against rental income?

No. If you are a private landlord with a buy-to-let mortgage, you can’t deduct mortgage interest from rental income to reduce your tax bill.

Instead, you will qualify for tax credit based on 20% of your mortgage interest payments.

» MORE: How tax relief works and how to claim it

Can I use an offset mortgage for buy to let?

Yes, buy-to-let offset mortgages are available, though not all providers offer them.

If you are a landlord paying more tax on rental income since the tax rules changed, you might want to reduce the amount of interest you are charged on a rental property mortgage. Offsetting your savings might help achieve this, and clear your mortgage earlier.

Can I get an offset remortgage?

Yes, it is possible to offset your mortgage when you remortgage. This might be because you have built up your savings through receiving an inheritance, or had a salary increase, and you want to reduce how much mortgage interest you are charged.

You could ask for this facility through your existing lender or from your new lender if you are moving your mortgage elsewhere.

Bear in mind you will need to fulfil certain lending requirements, such as not exceeding the maximum LTV.

When you remortgage, be aware of the possibility of being charged for leaving your current deal and taking out a new one, or for making changes early. The deal isn’t your mortgage term, it's the period of time you gain a specific benefit from, such as a fixed rate of interest for three years.

Can I get an interest-only offset mortgage?

Some lenders offer interest-only offset mortgages, where your savings help reduce how much interest you pay on your mortgage. But unlike a repayment mortgage, you don’t pay back the borrowed amount until the end of the mortgage term. You’ll be asked to have a repayment strategy to show that you’ll be in a position to pay back the original loan once the mortgage term ends. You will also need to pass affordability checks, which may include showing you could comfortably afford to pay an equivalent repayment mortgage and that you have a minimum income.

» MORE: How much mortgage can I afford?

Can I get an offset mortgage with bad credit?

Having a poor credit score may mean you’ll find it hard to pass the lender’s affordability checks. You may need a larger deposit, or be offered higher interest rates than if you had a good credit history.

Even so, having a bad credit history doesn’t necessarily mean you can’t get an offset mortgage. While you may have fewer options available to you, there are specialist bad credit mortgage lenders.

You might want to consider taking a few steps to improve your credit score before applying for a mortgage to help you access lower rates and increase your chances of being accepted.

» COMPARE: Bad credit mortgages

Is there a limit to the amount I can offset?

There is usually a maximum amount you can offset in your linked account, with anything above that limit not counting towards your offset benefits.

This surplus won’t earn you any interest, so you could move the surplus amount to another savings account.

The offset savings account may also have a minimum balance requirement.

What criteria will I have to meet to get an offset mortgage?

To be accepted for an offset mortgage you will need to provide the same information and meet similar eligibility criteria as other types of mortgage.

This includes having a good credit score and meeting the lender’s affordability requirements. With an offset mortgage, there may be a maximum LTV you can apply for, and you may need a deposit or equity of at least 25% of the value of the property.

How can I compare offset mortgages?

A simple way to get quotes from a number of specialist providers is by using our mortgage comparison tool.

Once you’ve filled in the short form, you’ll be matched with suitable lenders and can compare your options. You can then apply direct with the provider or through a broker.

When you’re comparing your options, look at the interest rate charged and whether the initial rate is fixed or variable. Also factor in additional fees, such as application and completion fees, along with any penalties for paying all or part of your mortgage off early.

NerdWallet has selected Koodoo to provide you with this information-only online comparison service on a non-advised basis. NerdWallet will receive a share of the commission that Koodoo earns from the lender or from our partnered broker, Fluent Mortgages.

Koodoo is the trading name of Mortgage Power Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 845978), and is a registered company in England and Wales (company registration number 10978680), with a registered address at Scale Space, 58 Wood Lane, London, W12 7RZ

Fluent Mortgages Ltd is authorised and regulated by the Financial Conduct Authority (FRN 458914), and is a registered company in England and Wales (company registration number 10978680), with a registered address at 102 Rivington House, Chorley, New Road, Horwich, Bolton, BL6 5UE