What is an offset mortgage - and could it work for me?

If you have significant savings, offsetting could help you to pay less for your mortgage.

Publication date: 27 November 2024
Reading time: 3 minutes

In a nutshell, offsetting means your mortgage is linked to your savings account, and what you pay on your mortgage depends on what’s in the savings account. The more you have saved, the less interest you’ll pay on the mortgage.

It’s important to say that offsetting doesn’t affect the capital on your mortgage – just the interest. If you have an interest-only mortgage, it will reduce your payments. And, as we’ll explore later, if you’re on a capital and interest mortgage, offsetting can allow you to reduce your outstanding mortgage much faster.

Full offsetting

This is when you have enough in your linked savings account to cover what you owe on your mortgage. In this case you won’t pay any interest on your mortgage at all.

Example

Sarah takes out an offset mortgage of £350,000. She also has £350,000 in her savings account, so she won’t pay any interest on her mortgage.

Partial offsetting

This is when you’re borrowing more than you have saved, but you still offset some of the mortgage interest you’d otherwise have to pay.

Example

Sam takes out a mortgage of £250,000 and has £50,000 in his savings. He will pay interest on the £200,000, having offset the other £50k.

How does offsetting work in practice?

Your lender calculates your mortgage interest on a daily basis, comparing what you owe on your mortgage to what’s in your savings account and charging you interest on the difference.

Because the interest is calculated daily, it gives you a fair degree of flexibility.

Example

Niv currently owes £150,000 on her mortgage and has £150,000 in her savings, so her mortgage is fully offset.

However, on Wednesday her builder sends her an invoice that she’d forgotten about. It needs paid immediately, for £15,000. She takes this out of her linked savings account.

On Friday she’s paid her annual bonus. She replaces the £15,000 in her savings account that afternoon.

Her mortgage lender will charge her mortgage interest. This will be worked out at whatever the current rate is, for two days, on the £15,000.

Multi part mortgages

If you need to borrow a significant amount of money for your mortgage, but don’t have enough to offset it fully, some lenders offer multi-part mortgages to help suit your circumstances.

This could allow you to fully offset one part, and take out a different mortgage product to fund the other part.

Example

Sam’s friend Sunita is considering a mortgage of £700,000 and has £100,000 in savings. She chooses to take a multi-part mortgage – Part 1 is for £100,000, fully offset, and Part 2 is a five-year fixed rate mortgage to cover the remaining £600,000.

What if the savings rate changes?

It doesn’t matter, as you won’t earn anything on your savings while they’re linked to your offset mortgage.

What happens if you have more in your savings than you need to offset?

You won’t earn any interest on savings above what you need to offset your mortgage.

Example

Simon’s offset mortgage has £400,000 outstanding, and his linked savings account has £500,000. He may be better taking the extra £100,000 and saving or investing it separately.

What happens as your mortgage balance comes down?

As we’ve said, it’s a very flexible arrangement. The more that’s in your savings compared to what you owe on your mortgage, the less interest you pay.

If you want to be fully offset as often as possible, just make sure your savings cover your outstanding balance. As that comes down, you can spend more from your savings.

Example

It’s 1 October and Ben owes £20,000 on his offset mortgage. He also has £20,000 in his linked savings account.

Three months later, on 1 January, Ben has got his mortgage balance down to £15,000. He’s able, if he wants, to take £5,000 out of his linked savings and he still won’t pay any interest on his mortgage.

Benefits of offsetting

Your mortgage costs less in almost all cases

When mortgage debit interest rates are higher than savings credit interest rates (as they often are), offsetting could potentially leave you better off overall.

Example

Nadia is thinking of taking out a mortgage of £100,000, at 5% interest.

She also has £100,000 in an instant access savings account, earning 3%.

If she instead opts for an offset mortgage, she no longer gets anything on her savings, but she doesn’t have to pay the interest on her mortgage either.

Even if savings rates were higher than mortgage rates, offsetting could still be tax-efficient – see below for more details.

You may be able to pay your mortgage off more quickly

Whether it’s interest-only or capital and interest, you have less to pay, and can potentially repay your mortgage more quickly.

If you take out a capital and interest mortgage, your lender usually works out your monthly payment assuming you aren’t offsetting. If you then choose to offset the mortgage, the payment stays the same. This means that the proportion of it usually needed to cover the interest is instead reducing the capital, reducing the outstanding mortgage much more quickly.

Flexibility

Offsetting allows you to keep your savings intact while borrowing, potentially leaving a large lump sum available for other ventures. You can still use them as you choose, dipping in and out when you need.

No early repayment charges

When offset mortgages are variable rate, as they are at Handelsbanken, there’s no early repayment charge (ERC) if you want to pay off your balance early. There may be some administrative costs but these will be relatively small.

Tax-efficiency

If you have significant savings, you’ll usually have to pay tax on any interest you earn on them. If you use those savings to offset your mortgage, you don’t earn any interest. So you don’t have to pay tax.

Drawbacks

The most obvious one is that you potentially need a lot of money to make offsetting worthwhile.

As we discussed above, what you pay for your mortgage may go up if you make a withdrawal from your linked savings account.

Finally, you won’t earn any interest on your savings, but as we said above in many cases you’re better off overall if you’re saving yourself mortgage interest.

Not many instant access savings accounts pay the interest you could potentially save on your mortgage.

Find out more about this and our other mortgage products.