What is an offset mortgage?

An offset mortgage works in the same way any other mortgage works with the addition of the ability to reduce the amount of mortgage interest you pay. This is done by utilising a savings pot to reduce the amount of the mortgage balance that you are charged interest on.

For instance, if you have a mortgage of £200,000 and have a savings balance of £50,000, you will only pay interest on the £150,000 as you have “offset” £50,000. This can be a very powerful tool to reduce the overall cost of interest you pay on your mortgage. As you may expect, the higher the interest rate on the mortgage, the bigger the benefit of offsetting. Similarly, the higher the savings balance the less interest you pay.

There are primarily two ways of offsetting.

You can either start with a lump sum or you can set up an account that you pay into and as the account grows, the more you increase the portion of the mortgage that you don’t pay interest on. Of course, you can do both simultaneously, should you have a little pot now and then want to steadily build on that.

The savings that you use to offset your mortgage are usually held in an account with the same provider as the mortgage company and can be accessed at any time. If you reduce your savings pot, this will reduce the offsetting benefit. The other key point to remember is that you generally won’t earn any interest on the savings that you hold, though the benefit of interest reduction on the mortgage would usually outweigh this “negative”.

It is even possible to use close family members savings to help with this so it could be a solution for the family member who wants to help you with your mortgage or house purchase but is perhaps keen to keep control of their money.

Scenario – Reducing the monthly payments

If we take a £200,000 mortgage, over 25 years, based on an interest rate of 5.5% which is being offset by a savings pot of £50,000. If you opt for using the benefit to reduce your monthly payments, the result will look roughly like the above.

Scenario – Reducing the overall term of the mortgage

If we take a £200,000 mortgage, over 25 years, based on an interest rate of 5.5% which is being offset by a savings pot of £50,000. If you opt for using the offset to reduce the overall term, the result will look roughly like the following

We have used the offset calculator on the Accord website to produce the graphs for reference. (https://www.accordmortgages.com/tools-and-guides/offset-calculator)

If you are saving for a wedding, car or school fees, you could think about changing your mortgage over to an offset mortgage and could be utilising your monthly savings to reduce your mortgage interest whilst you save.

In summary, offsetting can be a powerful tool to reduce the amount of interest you pay on your mortgage. Even if you do not have much saved at this moment in time, the ability to build a savings pot increases the offsetting power over time.

This article was written by Chris Billingham

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.