What is an offset mortgage?
An 'offset' mortgage is a multifaceted type of mortgage that allows a homeowner to offset their savings against the value of their mortgage.
This doesn’t mean losing any savings - only any interest you would normally gain. Instead, offset mortgages use your savings to cut the amount of interest you pay on your mortgage.
How does an offset mortgage work?
If you had £10,000 in savings and a £120,000 home loan, this mortgage type allows you to offset these savings against the loan, meaning that you only pay interest on £110,000.
Consequently, more of your repayments go towards paying off the mortgage rather than the interest, so you can be free of your mortgage faster!
Some offset mortgages allow you to link a current account and savings balances to the mortgage. However, most only allow you to use your savings pot. These both work in the same way but are sometimes described differently.
There are similar mortgages available for first-time buyers that use savings as a bond to reduce the loan-to-value requirement.
The many efficiencies of offset mortgages
Using your savings to offset a mortgage means that you avoid paying tax on your savings because you are no longer earning income from them.
Make More From Your Savings By Overpayment
The interest rate you are paying on your loan is likely to be much higher than the net returns you would receive from standard savings accounts - especially given the poor performance of the savings market right now.
So why not put your savings to better use by allowing them to reduce the interest-viable portion of your mortgage? The more you can offset this portion of the loan, the more you are effectively overpaying your mortgage, which could save you thousands of pounds in interest over the lifetime of the mortgage.
Flexible Link With Savings
Offset savings deposits are usually kept in a linked account so that interest can be calculated on the amount that is offset against your loan.
But this is usually flexible to your needs. So if you increase your deposits, the loan amount on which you pay interest will fall. If you need access to your savings in an emergency, it will simply increase the loan amount on which your interest is paid to reflect what is left in your account.
With providers all offering different deals, use Which4U's offset mortgage comparison to find yourself the best deal.
As always, we recommend that you seek professional advice if you are unsure which type of mortgage is right for you and that all of the information provided above is for use as an overview only and should not be the basis for your mortgage decision.