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What’s the big deal with Offset Mortgages?

This guide was last updated 8 November 2017

Offset Mortgages haven’t enjoyed the level of popularity in the UK that they have in other countries.

Just 6% of UK mortgages are Offset Mortgages and part of the reason for this is that people don’t fully understand what they are, or have simply not heard of them. We’re here to solve both those problems.

So what are Offset Mortgages? Specialist mortgages have a reputation for being complicated and too difficult to get one’s head around. But Offset Mortgages are refreshingly straightforward – put simply, they let you reduce the interest on your mortgage by using a savings account with the same bank.

Until recent years, mortgages and savings had been part of separate conversations, but it makes sense for them to be related. After all, you can use your home equity to get a better deal when you remortgage, so why not your savings? Well, that’s what Offset Mortgages are for. With an Offset Mortgage, you can use your existing savings to balance (or ‘offset’) the total mortgage amount you have borrowed. So if for example, you want a mortgage of £500,000 and have savings of £150,000, then you only have to pay interest on the difference between the two. In this example, you would only pay interest on £350,000.

In doing this, you have the choice of either reducing your monthly costs or – more favourable with most lenders – paying the same every month but also paying back your mortgage more quickly overall. That’s not the only advantage, though. Usually, you need to pay income tax on interest earned from savings, but if you’re offsetting your mortgage with your savings, you won’t earn any interest so you don’t need to pay tax.

“it’s never been a better time to get an Offset Mortgage”

You might have just spotted the mention that you won’t earn interest on your savings if you use them to offset your mortgage. This might be off-putting to some people who rely on their interest like dividends, but with the Bank of England interest rates so low it’s never been a better time to get an Offset Mortgage. In most cases, the money you save on your mortgage interest will mean you are better off with an Offset Mortgage than you are with interest on your savings.

You won’t need to worry about access to your savings either, because Offset Mortgages are flexible and allow you to dip into your savings whenever you need to. Just be aware that the more you take from your savings, the less you will have to offset your mortgage. The level of flexibility this allows could be particularly useful for self-employed people or contractors who need to have a separate account to pay their tax at the end of the year. By keeping money that has been put aside for tax in a savings account, they can use it to offset their mortgage until it’s time to pay the taxman.

This mortgage deal is specifically helpful if you have a significant amount in savings against which you can offset a mortgage. Interest rates on Offset Mortgages tend to be higher and are only really worth it if you have a large sum to offset. It’s not always easy to tell if the savings you have will work out cheaper in the long run with an Offset Mortgage or another type of mortgage, so it’s very important that you talk to a professional that understands your situation. At Coreco, our highly-experienced specialists are more than capable of offering you advice to make the best of your circumstances. We’d be happy to talk to you about your options, just get in touch using our contact page.