Offset mortgages: how they work and who they work for

When considering finance for your home, there is a lot more to consider than simply deciding between a fixed or variable rate. Many lenders have been innovative over the years to appeal to client needs; one such option is an offset.

Could it be a good option for you?

First and foremost, these aren't for everyone. As always, we recommend you obtain bespoke advice to see what is best for you, taking your current financial circumstances into account.

It’s also worth noting that not every bank or building society offers an offset product; some even dip in and out of this market, so just going to your bank might not open it up.

So, what is it and how does it work?

Broadly, it's aimed at those who have savings they need easy access to and that they will still want access to once they have taken out their mortgage.

If, for example, you take out a £200k mortgage yet you will retain (or build up quickly) £50k worth of savings, on a regular mortgage you would pay interest on the mortgage amount as usual and would keep your savings where they are, receiving interest along the way. With an offset mortgage, you can use your £50k savings so you only pay interest on £150k, thus reducing your monthly repayments whilst still retaining easy access to all or part of the £50k whenever you need it.

As you would expect, you are charged interest on the outstanding mortgage balance; that is until or unless you add funds to what's usually referred to as the 'savings pot'.
In effect, you’re not getting interest on your savings however, you are saving on your borrowing by way of tax on your mortgage.

Also, most pay tax on their savings so by having the savings sit on top of your mortgage debt you are effectively saving or earning the mortgage rate, which is almost always higher than easy access savings accounts, tax free.

Another advantage of offset mortgages is the simple way you can organise your budgeting, with most providers allowing you to have several 'pots' which you can name according to their purpose: 'holiday fund', 'emergencies', and so on.

Many small business owners like the fact you can have a pot for tax bills or similar, so it really appeals to them.

Another benefit is that the majority of plans allow you to overpay as much as you like without penalty when times are good; and allow you to save interest instantly yet draw that money back If you need it – up to the original agreed mortgage amount, usually at the same rate.

Of course, the above is merely general information. Naturally, rates of both interest and tax vary, though at the time of writing (August 2018), interest rates are low. And with lenders’ products changing too, if at any point, you consider taking out an offset mortgage, please remember to seek specialist advice at that time.

August 2018