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What is an offset mortgage?

What is an offset mortgage?

By Anya Gair
Last Updated 12 October 2023

Interested in an offset mortgage? Whether you’re looking to lower your mortgage interest rate, or help a loved one buy, find all the answers to your burning questions about offset mortgages in this guide.

In this guide

What is an offset mortgage?

An offset mortgage is a type of mortgage loan that is linked to one of your savings accounts. Instead of the savings being used to pay off your mortgage loan, they are used to “offset” your mortgage loan. This is a tactic used to reduce the amount of interest you pay on your mortgage, but is not always the best option for everyone.  

How does an offset mortgage work?

Offset mortgages work by “offsetting” the amount of money you owe your lender on your mortgage loan against what you have in a savings account. Your lender “takes away” the amount of money you have in savings from the amount you owe on your mortgage. Then, you only pay interest on the amount that’s left. 

For example, let’s say you have a mortgage of £200,000, and have £30,000 in savings. With an offset mortgage, you would only pay interest on £170,000 of the mortgage, instead of the full £200,000. 

If you had an interest rate of 4%, that would mean paying £897 per month, £159 less than if you were on a standard repayment mortgage with the same rate, based on a 25 year term.

How do family offset mortgages work?

A family offset mortgage, also known as a family springboard or Savings as Security mortgage, is when one of your family member’s savings will be linked to your mortgage instead of your own. This is normally a parent, or grandparent who takes the role of a guarantor by offering their savings as security for your mortgage. This can help you get on the ladder sooner if you don’t have a deposit saved up, or are struggling to put enough money aside.

You might also like: How to buy a home with a small house fund

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What are the advantages of an offset mortgage?

Because you only pay interest on the amount left after the lender “takes away” the value of your savings from your mortgage debt, you pay less interest with an offset mortgage than with a standard repayment mortgage.

You may still be able to add money to your savings pot, which could reduce your interest rate even more as you’ll have a larger amount of money to offset your mortgage. 

What are the disadvantages of an offset mortgage?

You may not be able to withdraw your savings, and if you can, doing so will reduce the amount used to offset your mortgage loan. This will have the knock on effect of increasing the size of your loan which the interest is based off, increasing the amount you’ll pay. 

Another disadvantage of offset mortgages is that while your savings are used to offset your home loan, you won’t earn any interest from your savings account. This could see you missing out on potential gains if interest rates are particularly high, which is good for savers.

The interest rates on offset mortgages can also be higher than on a standard repayment loan. However, the more you have in savings, the more you can offset your mortgage, helping to reduce the amount you’ll pay in interest.

Can I overpay on my offset mortgage?

Many lenders will let you overpay on an offset mortgage, but normally only by a certain amount. This is typically limited to 10% of the outstanding mortgage loan each year. It’s important you stick to these limits, because if you go over you may have to pay an early repayment charge (ERC).

Which banks offer offset mortgages?

There are a variety of banks and building societies which offer offset mortgages, however it can be difficult to know which lenders do offer them, and whether you’d be accepted. Affordability and mortgage eligibility criteria differ from lender to lender, so while one lender may accept you for an offset mortgage, another may reject your application. 

The best way to find out if an offset mortgage is right for you and if you could be eligible for one before applying is to work with an experienced mortgage broker - particularly one that uses a digital fact find.

Choosing a mortgage broker who uses a digital fact find in their process will allow you to get your eligibility checked against thousands of mortgage products from across the market. At Tembo, our online Fact Find will give you a view to your eligibility in 10-minutes, scanning over 100 lenders and over 20,000 mortgage products. So you can ensure you are applying for the best deal for you, without being rejected from multiple applications.

Are offset mortgages a good idea?

Offset mortgages can be a good idea for some borrowers, for example those who have a large amount of savings and want them to work harder for them. If you have a large amount of money saved up and it’s not earning much in interest, it could be more beneficial to use these funds to offset your mortgage and reduce the amount of interest you pay.

An offset mortgage can also help you access lower interest rates, helping to reduce your monthly payments which could allow you to save more each month. However, there are other ways you could access lower rates which might be better suited to you. It’s always best to speak to a mortgage expert before making a decision. They can help you weigh up your options, and not only work out if an offset mortgage is the right choice but also help you find the best deal for you from across the market.

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