Offset Mortgages

An offset mortgage will be connected to at least one savings account with your mortgage provider. These mortgages are usually offered by banks, but they are also available from other lending institutions like building societies. 

What Is An Offset Mortgage?

An offset mortgage will typically see a lender deduct (offset) the value of your mortgage from the value of your savings, and charge you interest on the difference between the two amounts, rather than the full mortgage amount. This effectively puts you in a situation where you are overpaying (without incurring fees) on your mortgage each month, shortening your loan term.

While your savings are offset against your mortgage, it’s important to note that you can’t use your savings to pay off the mortgage – you’ll need to use income or other revenue to make your monthly payments as you would a conventional mortgage.

The main benefit of offset mortgages for you as a borrower is that you’re paying less interest than you would with more conventional (i.e., capital and interest) mortgages. This is because the amount your interest is calculated on is based on the difference between your savings and your mortgage, rather than the total mortgage amount. As a result, lenders usually won’t let you earn interest on any savings linked to an offset mortgage. However, the saving you make on the offset mortgage is usually more financially advantageous and can be more beneficial as you won't pay tax on any interest earned from your savings accounts.

Key Advantages of Offset Mortgages

Offset mortgages are best used in certain scenarios – if you have significant capital in savings accounts, for example. However, there are other benefits, which include:

• They can reduce the amount of interest you will pay on your mortgage, and will typically result in higher net savings than what you'd earn on interest on your savings
• The capital used in a savings account that is used to offset your mortgage won't earn interest, reducing any fiscal liability on this amount.
• Offset mortgages can offer greater flexibility than a standard capital and interest mortgage. You can opt for lower repayments and a longer mortgage duration or larger repayments to pay off the mortgage faster and lower your interest rate.
• In many cases, they can be linked to multiple savings accounts, effectively reducing the offset amount (i.e., by using as many savings accounts as possible to make the difference between your savings and your mortgage as small as possible). This is beneficial if you have several income streams feeding into different savings accounts.
• They can function as a flexible facility, allowing you to draw down and repay the balance (savings) as you wish without incurring penalties, although it’s worth noting that if you dip into your savings, you will increase the offset amount and pay more in interest.

Offset mortgages are generally available for most borrowers with significant capital reserves in savings, but they are especially beneficial for high-net-worth individuals, as they often have sizeable savings accounts, especially in certain scenarios, such as when they want to retain capital reserves in case of economic volatility or because these are fewer high-ROI opportunities. 

Offset mortgages are highly advantageous for some borrowers and other mortgage products are more beneficial for others – the product that will work best for you will depend on your financial situation, plans and the amount you want to borrow. To know if an offset mortgage is the right choice for you, we can run cost simulations and comparisons that will allow you to compare the different mortgage products you’ve been offered and understand what they cost, what you will potentially save or which the most competitive product is for you. 

You’ll usually be able to use your savings during the mortgage term, freeing up liquidity and paying more interest on the basis that you have a larger offset ‘gap.’ Lenders are open to this, especially at the top of the market for quality borrowers with a significant asset base that brings comfort. However, it is worth discussing your plans with a broker upfront, especially if you believe you might want to take out a significant amount of your savings. The ability to draw down significant amounts from your savings will impact what interest rate you pay – in some cases, quite substantially – so factoring costs is essential. Lenders may also restrict how much you can draw down from savings, and it may be beneficial that we negotiate terms or flexibility upfront, depending on your needs or why you may want to draw down capital.

Offset Mortgages: What’s Available?

Offset mortgages can be either fixed or variable-rate mortgage products. The best option for you will depend on your situation and financial requirements. Some borrowers prefer to have fixed rates because it gives them more clarity on monthly payments – especially as interest rates rise. However, variable rates (which will rise and fall with the Bank of England Base Rate) can be more competitive and may be more appealing to a borrower that doesn’t need absolute certainty of what they will pay each month. As it’s expected that the Bank of England’s base rate may peak relatively soon, many borrowers are considering variable-rate mortgages as potentially more competitive than fixed-rate equivalents. Ultimately, there is no ‘better’ option: both variable and fixed rate offset mortgages have advantages and potential downsides. The best product for you will be the one that is best suited to your financial situation, goals, requirements and what’s comfortable in terms of having the certainty of fixed or changeable monthly payments. 

Family Offset Mortgages

While offset mortgages can be advantageous for any borrower with a large savings reserve, they tend to be most beneficial to wealthy individuals who have substantial savings and a significant deposit for a mortgage. Large offset mortgages (several million pounds) are available. As with conventional mortgage products, the higher your deposit the more competitive your interest rate is likely to be, particularly in conjunction with significant savings, which will maximise the amount that is offset.  

Family offset mortgages are also a possibility and can be useful for parents or grandparents who want to assist in the purchase of a property for a child or grandchild. Usually, the savings account owner will allow this amount to be used for the offset, essentially helping the family access more competitive rates. This setup allows older generations to assist close family members to make property purchases without giving a lump sum gift, which can have fiscal implications. Family offset mortgages also allow you to retain control of your savings and share responsibility with your family: you can help family members get a competitive mortgage, but you aren’t responsible for making monthly payments. How you plan to use your savings needs to be carefully planned if you are considering a family offset mortgage because if you reduce the amount in your savings account, the mortgage holder will incur larger payments, so family offset mortgages tend to be an ideal scenario if you don't plan on drawing down your savings.

How Enness Can Help

If you’re considering an offset mortgage or you want more information about the benefits of an offset mortgage, get in touch. We will walk you through all your options and will be able to give you indicative rates and terms to consider.

Offset Mortgage FAQs

1. How does a mortgage offset work?

A mortgage offset works by linking your mortgage to one or more savings accounts. Instead of earning interest on your savings, the balance is deducted from your mortgage when calculating the interest you owe. For example:

• If you have a mortgage of £500,000 and £100,000 in savings, you’ll only pay interest on £400,000.
  This setup reduces the interest you pay, effectively shortening your mortgage term or lowering your monthly repayments without withdrawing your savings.

2. What is the difference between offset and traditional mortgages?

Offset Mortgages:

• Link savings accounts to the mortgage to reduce the amount of interest paid.
• Allow flexible overpayments without penalties, depending on the offset balance.
• Typically do not earn interest on linked savings but save on mortgage interest instead.

Traditional Mortgages:

• Calculate interest on the total loan amount.
• Savings accounts are separate and can earn interest, subject to taxation.
• Overpayment flexibility varies, often limited by lender restrictions or early repayment charges.

Offset mortgages benefit borrowers with significant savings or those prioritising tax efficiency, while traditional mortgages suit borrowers without substantial savings.

3. Are offset mortgages tax-efficient?

Yes, offset mortgages can be tax-efficient. Here’s why:

• Interest earned on traditional savings accounts is subject to income tax, especially for higher-rate taxpayers.
• With offset mortgages, savings reduce mortgage interest costs instead of earning taxable interest.
• For high-net-worth individuals, this can result in significant savings, as the interest "earned" through offsetting is effectively tax-free.

For example, if your mortgage interest rate is 5% and you’re offsetting £100,000, you’re effectively saving £5,000 annually without incurring tax.

4. Can I access my savings during an offset mortgage term?

Yes, most offset mortgages allow access to your savings during the term. However, withdrawing funds will increase the balance on which interest is calculated, leading to higher repayments or a longer loan duration.

• Flexibility varies between lenders; some allow unrestricted withdrawals, while others may impose limitations.
• It's important to plan carefully and discuss terms upfront, especially if you anticipate needing substantial access to your savings.

For borrowers with significant liquidity needs, structuring the mortgage for maximum flexibility is advisable.