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Interest-Only Offset Mortgages

Looking for an interest-only offset mortgage? Read through our guide to find out where to get expert advice about them

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 16, 2022

Mortgages can work in many different ways. The most basic involves saving a deposit of around 10% of the property value, borrowing the rest, and paying it back over 25 years. But, for people with unconventional financial situations, there are more complex options.

One of these is an interest-only offset mortgage. This is a product used in specific circumstances where a buyer has significant cash savings (that they don’t want to put towards the property purchase) and a future income event or events that will pay off their mortgage. This might sound confusing, but we’ll explain everything in this guide.

We’ll cover the following topics…

What is an interest-only offset mortgage and how do they work?

This type of mortgage combines two key features:

  • “Interest-only” means that your monthly repayments do not pay off the loan amount, only the interest due on it. The balance of the loan is usually repaid at the end of the mortgage term.
  • “Offset” means that the mortgage is linked to a cash savings account, with the money in that account earning no interest and theoretically deducted from the amount you owe. This reduces the interest due each month on the mortgage loan.

Here’s an example: Let’s say that you have a mortgage for £200,000 and you have £50,000 in a savings account. If you use these savings to offset the mortgage, you will only need to pay interest on £150,000 of the mortgage, instead of the full amount. You’ll pay this interest monthly and, at the end of the mortgage term, repay the £200,000 loan amount.

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Advantages and disadvantages

Here are some of the main advantages of interest-only offset mortgages:

  • By offsetting your savings against your mortgage, you can reduce your monthly repayments
  • As long as the interest rate on your mortgage is higher than the interest rates available on cash savings, you will save money overall
  • Your savings still belong to you, so you can dip into them if you need to
  • You will pay less each month because you are not making capital repayments
  • An offset mortgage can reduce your tax bill as you won’t receive interest on the portion of your savings you offset

However, no mortgage is entirely without drawbacks. In this case, they are that:

  • The interest rates for this type of mortgage are higher than for other mortgage types
  • You won’t earn any interest on your savings, so inflation will decrease their value over the long-term
  • If you need to dip into your savings, this will cause your mortgage repayments to rise
  • At the end of the mortgage, you will need a strategy to repay the whole of the initial loan amount
  • There is a limited choice of lenders offering this type of mortgage

With these drawbacks in mind, you should consider whether you would be better off using your savings to put down a larger deposit. This could give you access to better interest rates and potentially reduce your monthly repayments even further. The downside, in this case, is that your wealth would be locked up in property, not accessible in cash.

Why you should speak to a broker before you apply for an offset mortgage

Before you proceed with an interest-only offset mortgage application, it’s sensible to speak to a broker who specialises in this niche product type. They can help you in numerous ways…

  • They can provide all the information you need about interest-only offset mortgages and the various alternatives, and can answer any questions you have
  • They will give you their expert opinion on which is the best mortgage type for you, based on their understanding of your financial situation
  • Whichever mortgage you decide to apply for, they will compare deals from all the different lenders and use their market knowledge to find the best rate available for your circumstances
  • They will help you with your application to make the whole process quicker and easier

Lenders and their eligibility criteria

There are only around ten lenders who offer offset mortgages, including Accord Mortgages, Barclays, and Scottish Widows. In certain scenarios, they will consider providing an offset mortgage on an interest-only basis.

The eligibility requirements (e.g. age, credit history) are, for the most part, the same as for other mortgages – you can read about general mortgage criteria here.

However, with interest-only offset mortgages, there are some notable differences:

Property type

Interest-only mortgages aren’t usually used to buy your main home. They’re a far more common choice for a second home or buy-to-let transactions. Often, your repayment strategy will involve selling another property you own.

There are, however, a smaller number of lenders who offer them on a residential basis.

Repayment strategy

Your lender will want to know how you intend to repay the loan amount at the end of the mortgage period. The permitted methods vary between lenders, but include:

  • Selling another property (mortgaged or unmortgaged)
  • An existing endowment policy or ISA
  • Annual lump sums (e.g. bonuses)
  • Other investments
  • A pension lump sum

Income

Each of the lenders who offer this type of mortgage has a different minimum income requirement and it may depend on the circumstances. For example, Scottish Widows requires a minimum income of £100,000 if your repayment strategy is the sale of a mortgaged property. Others have no minimum income requirement.

Deposit

These mortgages are considered riskier than some others and so require a larger deposit, upwards of about 25% of the property’s value.

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Get matched with an interest-only offset mortgage expert

As this is a  niche area of the mortgage market, not every broker has the expertise to advise you on it. You will need to speak to someone who understands both offset mortgages and interest-only mortgages. If you’re looking into these mortgages because of your unusual income pattern, you’ll need someone who can understand the nuances of it.

We work with hundreds of brokers and offer a matching service to help people find the specialist best suited to their precise needs. You can use this service for free to set up an initial, no-obligation chat with a broker who specialises in interest-only offset mortgages.

To give it a try, just call us on 0808 189 2301 or make an enquiry online.

FAQs

Can I remortgage an interest-only offset mortgage?

Yes. If you currently have an interest-only offset mortgage but you’d like to find a better deal, it’s worth speaking to a broker, who can help you compare lenders and rates for remortgages. You’ll need to meet your new lender’s eligibility and affordability requirements.

Can I get an interest-only offset mortgage with bad credit?

It depends on the severity of your previous credit issues. Interest-only offset mortgages are considered riskier than some other mortgages, so lenders will be less willing to offer them to applicants with serious credit issues, such as county court judgements or bankruptcy. With late payments or historical defaults, it might still be possible.

Can you offset 100% of your interest-only mortgage?

A small minority of lenders might consider allowing this, but offsetting 100% of your mortgage wouldn’t mean paying no interest whatsoever.

There is likely to be a discrepancy because of the differences in how interest is charged on mortgages compared to savings accounts. Credit interest is based on the number of days in the calendar month, while debit interest divides the year into 12 and each month is treated equally.

For example, in February your credit interest would build up over 28 days, but interest on your mortgage debt for that month would be based on one twelfth of the year.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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