An offset mortgage is a pretty simple idea. It lets you use your savings to help reduce your mortgage debt, so you only pay interest on what’s left after subtracting your savings. However, your monthly mortgage payment is still calculated on the full mortgage amount before the offset, which means you end up paying off your mortgage faster since you inadvertently pay extra each month. Plus, you don’t have to pay tax on the interest you’d normally earn on your savings.
For example, if someone has a £100,000 mortgage and uses Intelligent Finance’s offset tracker loan rate of 5.24%, they could save over £39,000 in interest by offsetting with £20,000 in savings. This can also help pay off the mortgage five years earlier than the usual 25-year term.
Around 25% of main mortgage providers offer offset options. Some mortgages, like the One Account from the Royal Bank of Scotland, even let you offset your savings and current account balance against your mortgage. These offset and current account mortgages make up about 10% of the home loans market.
Most offset mortgages have interest rates linked to the Bank of England’s base rate, but there are also fixed or capped rate options. They offer flexibility to pay off more of the loan without penalties, pay less, or even take a payment break if you’ve made enough extra payments during the year.
On the downside, offset mortgages usually come with higher rates compared to regular ones, making them more expensive for the added flexibility. They might not be the best choice for everyone and aren’t very popular among all borrowers. For instance, recent data shows that only 1% of borrowers chose an offset loan, while 20% went for base rate tracker deals, and 18% chose low two-year fixed rates.
Mortgage adviser James Cotton from London & Country suggests that high-rate taxpayers should have at least £10,000 in savings to make an offset mortgage more worthwhile compared to a traditional one.
According to Ray Boulger from Charcol, while offset mortgages might not fit every buyer, their unique features can be appealing. They allow borrowers to offset multiple savings and current accounts. Some even let parents use their savings to offset their children’s mortgages, reducing monthly payments while still having access to their funds if needed.
Mark Pittaccio, a business development manager from Hertfordshire, values the flexibility of offset mortgages. Over the last six years, his offset mortgage has helped him renovate a property, buy a car, start a business, and plan his taxes effectively. Despite slightly higher rates compared to some competitive two-year deals, he feels the extra benefits make the cost worthwhile.