Your Complete Guide to Offset Mortgages in the UK

As a homeowner with a mortgage to pay, you would probably like to have the opportunity to pay off the outstanding balance of your mortgage early. The good news is that there is a way in which you can pay off the outstanding balance of your mortgage, and it is commonly known as the offset mortgageA mortgage where the borrower's savings are offset against t.... Offset mortgages are becoming a more and more popular way of paying off the outstanding balance on a home loan.

Such mortgages may be known by a variety of other names, including flexible mortgages, offset tracker mortgages, offset variable rate mortgages, savings mortgages, all-in-one mortgages, and first flexible mortgages. However, it’s important to note that regardless of the name used, we are specifically discussing offset mortgages in this article. Therefore, if you see any of these terms used in this article, please understand that we are referring to offset mortgages only.

In this article, we will explore the topic of offset mortgages in detail and answer frequently asked questions such as what is an offset mortgage, who are offset mortgages suitable for, what are the benefits of such mortgages, what are the downsides are and many more.

Introduction To Offset Mortgages

The way in which offset tracker mortgages can help you to pay off your outstanding debt quicker is that you take any savings you set against your outstanding mortgage debt, the interest on your savings is waived and in exchange, you do not have to pay the same amount on the mortgage that you still owe.

Paying your mortgage this way can save you a tidy sum of money over the lifespan of your mortgage, and over 25 years you could potentially save yourself thousands of pounds, and it is very efficient on tax as well.

Most people who have a mortgage will likely have some money tucked away in a savings account, and no matter how small these savings are in total, making use of them to pay off mortgage debt makes very good sense in the long term.

People who are saving will not have to pay tax on the interest that their savings generate, and this is handy for the reason that mortgage lenders who offer flexible mortgages typically calculate the interest on a daily basis. This means that for every single pound that is deposited is put to work in helping to reduce the cost of the mortgage. Another plus point is the fact that when interest rates are low, your savings will be earning a higher interest rate than the majority of the savings accounts that the high street banks offer.

Variants of the Offset Mortgage

Current Account Mortgage – With some current account mortgage you will be offered the choice of linking your current account or accounts as well as your savings, to the mortgage. Whilst other lenders will just make use of a pot of savings which is known as a flexible mortgageA type of mortgage that allows the borrower to overpay, unde..., both methods basically operate in the same way.

Flexible Mortgage – As detailed above, the flexible mortgage is a mortgage that uses a savings pot to offset the interest payments on your mortgage. This means that you are technically overpaying on your mortgage and therefore you will pay off the outstanding balance quicker. With a flexible offset mortgage, should you have enough money in the savings pot, you can actually underpay should you need to save money.

Savings Example of the Offset Mortgage

So for example, if you have a mortgage of £150,000 and you have £20,000 in savings, then the interest on your mortgage will only be charged up to £130,000. Plus, as well as using the savings pot, you can also make one-off over-payments whenever you like, and the great thing about the flexible mortgage is that so long as you have enough money in your savings pot, you can underpay and take a payment holiday.

Who Suits The Offset Mortgage ?

Typically, those people who are more suited to all in one mortgages will have a significant amount of money in savings. This is because it is those savings that are used to offset the cost of the interest payable on the mortgage. So therefore, if you do not have any savings then applying for an offset mortgage may not be your best option.

There are some building societies that have special family offset mortgages, and these are to help parents to get their children onto the property ladder. The parents will be able to use the money in their savings accounts to offset the interest payments on their children’s mortgage in order to lower their monthly repayments. The beauty of this method is that the parents can still gain access to their money should they need to.

In what manner does an offset mortgage function?

This mortgage works similar to other conventional mortgages , however, the difference is that you are able to link your savings account or accounts to the mortgage. This means that any money in those accounts will be used to offset the interest payments on your mortgage.

To illustrate how an offset mortgage works in the UK, consider a scenario where you have a mortgage of £200,000 and you also have £50,000 saved up in a savings account.. With this mortgage, the £50,000 in savings is used to reduce the outstanding balance on your mortgage to £150,000. You would only pay interest on the outstanding balance of £150,000, which means you could save money on monthly payments over the lifespan of the mortgage term.

It’s important to note that these mortgages in the UK may have higher interest rates compared to traditional mortgages, but they could potentially save you money on monthly payments in the long mortgage term, especially if you have significant savings. Additionally, not all lenders offer offset mortgages, so it’s important to do your research and speak with a mortgage advisor or specialist to determine if an offset mortgage is the right option for you based on your individual financial situation and goals.

To know more details about how an offset mortgage works, you can read our article here  —How does an offset mortgage work?

Mortgage Advice?

As many as a quarter of families in the UK could gain financial benefit from signing up to first flexible mortgages, however, experts warn that this type of mortgage is not suitable to everyone, and that most people would be far better off with just going for the lowest interest rate they can get.

The majority of offset mortgages on the market have interest rates that are tracked by the base rate set by the Bank of England; however, if you search hard enough then you can find an offset mortgage that comes with a capped rateA type of mortgage with an interest rate that cannot rise ab... or a fixed rate.

If you are unsure that an offset mortgages is right for you, then you should talk with your mortgage broker or mortgage specialist at your bank for more advice.

FAQs – Savings mortgages

What is an offset mortgage?

An offset mortgage in the UK is a specific type of mortgage that permits you to apply your savings to decrease the amount of interest you pay on your mortgage this means that you can reduce the amount of interest you pay on your mortgage by using the money in your savings account to offset the mortgage interest payments. To know more about offset loans, read our article.

Is it possible to use my existing savings account with an offset mortgage?

Yes, you can use your existing savings accounts with an offset mortgage. However, it is important to note that not all lenders offer this type of mortgage, so it’s important to do your research and speak with a mortgage or Financial advisor to determine if an offset mortgage is a right option for you based on your individual financial situation and goals.

What pros does an offset mortgages offer?

The main benefit of an offset mortgage is that it can help you save money on mortgage payments over the lifespan of the mortgage term. Additionally, you can still access your savings should you need to, and you can also use the money in your savings account to pay off your mortgage faster.

What are the downsides of this mortgage?

While this mortgages have many advantages, such as reducing the amount of interest you pay on your mortgage and giving you more flexibility in managing your mortgage payments, there are also some downsides to consider. Here are some potential downsides of the mortgage:

1. Higher mortgage interest rates: Offset mortgages in the UK may have higher interest rates compared to traditional mortgages. This could mean that you pay more in interest over the lifespan of the mortgage, which could negate the potential savings from the offset feature.
2. Fewer options: Not all lenders offer these savings mortgages, so you may have fewer options to choose from compared to traditional mortgages. This could make it more difficult to find a product that meets your individual needs and financial goals.
3. Loss of interest on savings: With this flexible mortgage, you won’t earn interest on the savings you use to offset the interest on your mortgage. While this can help to reduce the amount of interest you pay on your mortgage, it could also mean that you miss out on potential interest earnings on your savings.
4. Complexities: These mortgages can be more complex than traditional mortgages and may require more effort to understand and manage. For example, you may need to monitor your savings account and mortgage balance more closely to ensure that the offset feature is working properly.
5. Early repayment charges: Like traditional mortgages, these mortgages may come with early repayment charges if you pay off your mortgage early or make overpayments beyond the agreed limit. This could limit your ability to pay off your mortgage more quickly and could result in additional fees.

It’s important to consider these potential downsides when deciding whether an offset mortgage is a right option for you. Speak with a mortgage broker or specialist to determine if an offset mortgage is a good fit for your individual circumstances and financial goals.

Which are the different mortgage lenders who offer these mortgages?

The different mortgage lenders who offer offset mortgages include major banks, building societies, and other financial institutions. Some of the most popular lenders offering offset mortgages include Barclays, HSBC, Lloyds Bank, Santander, Nationwide Building Society, and NatWest. It’s important to compare the different options available from each lender to ensure you find the best deal for your individual circumstances.