An offset mortgage allows you to use your savings to offset your mortgage debt, in order to pay less interest on your mortgage – or to look at it a different way, "gain" more interest from your savings.
So, for example, if you have an outstanding mortgage debt of £100,000, and savings of £25,000 linked to your mortgage, you will only pay interest on £75,000 of your mortgage loan.
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How offset mortgages work
An offset mortgage can be linked to one or a number of savings accounts, usually held with the same bank as your mortgage. Some providers will also allow you to offset mortgage interest with a current account or even a business account – although the names on the account must be the same as on the mortgage.
You can retain access to your savings if you need to, but if you do make a withdrawal, your monthly mortgage repayments or the term of your mortgage loan could increase.
When you use your savings in this way, you are giving up the interest on your savings, instead putting it towards the interest owed on your mortgage. This means that you are effectively overpaying your mortgage, but are still able to get the money back if you really need it.
With an offset mortgage the interest is calculated daily, meaning that every pound in your savings works as hard as it possibly can to offset your mortgage debt.
How offset mortgages can benefit savers
Although the savings that you have linked to your mortgage debt will not directly earn you interest, the benefit comes from the interest they save you on the mortgage loan.
The net benefit of an offset mortgage is that you might be able to pay off your mortgage faster and save money compared to keeping your savings in cash.
This is where the tax system can work out to your advantage. In a savings account held outside an ISA, income tax is deducted from your savings interest, whereas in an offset mortgage, the amount you save on mortgage interest is not taxable. So offset mortgages could be a tax-efficient option – particularly for higher-rate taxpayers. Remember that tax rules can change over time and the value of tax savings will depend on your circumstances.
Ultimately you'll need to decide whether the amount of interest you would reduce from your mortgage is likely to add up to more than the interest that you could earn through a savings account. If so, an offset mortgage could leave you better off overall.
The main disadvantage of offset mortgages is that the interest rates tend to be higher than with other types of mortgage. You will need to work out whether the money you save by reducing the interest on your mortgage is enough to make up for paying a higher rate.
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The first step towards getting an offset mortgage is to compare rates and deals from lenders across the market. Use the selector below to find an offset mortgage that meets your requirements.
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