4 scenarios where an offset mortgage could be useful

An offset mortgage could help you pay less interest overall. However, they’re not the right option for every homeowner and there are some risks you might want to consider.

Read on to discover how offset mortgages work and the circumstances where they could be valuable. 

An offset mortgage links your savings to your mortgage

When you take out an offset mortgage, it’s linked to a savings account. The money held in the savings account doesn’t earn interest. Instead, the money you have saved is used to reduce the total balance you pay interest on each month.

As a result, the more you have in the savings account, the less interest you pay.

For example, if you had an offset mortgage for £150,000 and held £50,000 in the linked savings account, you’d only pay interest on £100,000. Over the full mortgage term, it could save you thousands of pounds and may allow you to pay off your mortgage sooner.   

If you have savings, an offset mortgage might seem like an attractive option, but there are some drawbacks you may want to weigh up first, including:

• The interest rate on an offset mortgage is usually higher than a comparable traditional repayment mortgage. You might want to spend some time calculating how much you could save when compared to other options.
• The money held in the savings account won’t earn interest, so it’s important to factor in this potential loss too.
• There are fewer offset mortgage providers to choose from than if you opted for a standard repayment mortgage, and some may have high fees.

Some will find the advantages of an offset mortgage outweigh the disadvantages, and there are some situations where it can be a valuable option, including these four. 

1. You have savings that are earmarked for a future goal

If you have savings that you’ve set aside for a medium- or long-term goal, an offset mortgage could provide a way to reduce the amount of interest you pay without tying the money up in property. 

For example, you might have a lump sum that you plan to use in your retirement. As it’s intended for a goal, you may not want to use the money to reduce the outstanding mortgage, but an offset mortgage could provide you with some flexibility. 

You can usually withdraw money held in a savings account linked to an offset mortgage when you need to. So, it could be a useful way to hold an emergency fund too if your savings are accessible. However, keep in mind that if you withdraw money the savings you make will decline, and it could mean you end up paying more than you would if you took out a traditional repayment mortgage. 

2. You’re self-employed 

Many self-employed workers build up substantial savings over the year to pay their tax bills. Depending on your circumstances, adding this money to a savings account linked to an offset mortgage could be more valuable than the interest it’d earn if it was in a traditional savings account. 

3. A loved one wants to offer support

First-time buyers are relying on the support of loved ones more than ever. Indeed, according to Legal & General, family members gifted around £8.1 billion to aspiring homeowners in 2023 and played an essential role in more than half of the purchases made by under 35s.  

While gifts that act as a deposit are becoming more common, family members might not be in a position to do this but still want to offer support. If they have savings that they don’t intend to use now, an offset mortgage could offer a way for them to improve your financial circumstances, while still having access to the money for future needs.

Some lenders offer a type of offset mortgage for this purpose, sometimes known as a “family mortgage”. With a family mortgage, your loved one could place a lump sum in a savings account which can act as a deposit and would be used if you didn’t keep up with mortgage repayments. It could be a useful option for buyers who are struggling to save a deposit or meet affordability criteria. 

At the end of the term, assuming you’ve met your mortgage repayments, your family member would regain access to their savings, sometimes with interest added. 

4. You could pay tax on interest from savings 

Interest rates rising has been good news for savers. Yet, it also means that more people are expected to pay tax on the interest their savings earn.

A report in the Telegraph suggests more than 1 million more savers were dragged into paying tax on their savings in 2023/24 as a result – adding up to around 2.7 million people.

If the interest you earn on your savings exceeds the Personal Savings Allowance (PSA), it could become liable for tax. In 2024/25, the PSA is:

• £1,000 if you’re a basic-rate taxpayer
• £500 if you’re a higher-rate taxpayer
• £0 if you’re an additional-rate taxpayer. 

As the savings held in an account linked to an offset mortgage don’t earn interest, it could be a way to reduce your overall tax bill while reducing the amount of interest you pay on your mortgage. So, an offset mortgage could be particularly useful if you’re an additional-rate taxpayer or already have savings that could mean you’ll exceed the PSA.  

Contact us to talk about your mortgage needs

If you’d like help securing a mortgage, including an offset mortgage, please contact us. We can offer guidance about which type of mortgage may suit your needs and lenders that are more likely to accept your application. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.