How does an offset mortgage work?
The following example illustrates how offset mortgages work…
Let’s say you have a £100,000 mortgage and £10,000 in a savings account – you would only pay interest on £90,000 of your mortgage if you ‘offset’ your savings against it. If your interest rate is fixed at 3%, for instance, you would save a total of £300 per year.
However, in order to calculate how much you’d be saving it total, we need to factor in how much interest you would have accrued on £10,000’s worth of savings in a year. The amount of interest charged on a mortgage is usually higher than the interest a pot of savings generates – a rate of around 1.5% is standard – so it might be in your interest to link your accounts.
At that rate of interest, £10,000 in savings would accrue £150 per year in interest, so you would still be £150 in the black each year if you were to link your account to your mortgage.
Can I offset my mortgage against my current account as well?
Yes, some lenders will allow you to offset your current account against your mortgage, as well as your savings, and it might pay to do so if you have a significant amount in there. Linking a main bank account usually means you will pay even less interest on your mortgage.
Can I offset my mortgage against an ISA?
Yes, this may be possible as some lenders will allow you to link a cash ISA you hold with them to an offset mortgage. The more accounts you can link, the less interest you’re likely to pay.
However, you should be aware that some lenders will only allow you to link instant-access cash ISAs to a mortgage, and not fixed-term ISAs. You also won’t be paid interest on your ISA account while it is linked to your mortgage, although there could be overall savings due to the lower interest.
It is not usually possible to offset a stocks and shares ISA against a mortgage.
Can I offset my savings against somebody else’s mortgage?
Yes, some lenders offer what is called a ‘family offset mortgage’ for borrowers who want to help out a family member by reducing their mortgage interest payments. They work in exactly the same way as regular offset mortgages, with the borrower’s loved one only paying interest on the mortgage amount minus the figure in the linked savings account.
Should I get an offset mortgage?
To answer this question, you should make yourself aware of the main advantages of an offset mortgage and weigh them up against the disadvantages.
The pros of using an offset mortgage facility
- They can be a useful way to rearrange your savings if they aren’t working for you (perhaps because of low interest rates or a hike in inflation)
- If you’re a contractor or a freelancer on high income, reducing your monthly interest can help you save up in preparation for an incoming tax bill.
Conversely, if you save for your yearly tax bill you can offset these savings against a mortgage.
- You can normally choose between paying the same amount you were paying before you linked your savings, meaning you will be making over-payments and settling your mortgage earlier.
Alternately, the lender can recalculate your monthly payments based on how much savings you have linked, so you will be paying less each month but paying the loan off no quicker
- Some offset mortgages let you draw down on the over-payments. You could either withdraw this money or choose to miss or reduce some mortgage payments
- Adding your current account can lead to further savings
- They can be used to help family members onto the property ladder as some lenders allow you to offset your savings against another person’s mortgage
- You can still access your savings, although some lenders might expect you to leave a minimum amount in your linked account
The cons of a mortgage with an offset account
As is the case with any financial product, an offset mortgage may come with pitfalls for certain borrowers, and it’s important to check whether they will apply to you before proceeding.
- Interest rates can be higher for offset mortgages
- You won’t earn interest on your savings, although the amount of interest charged on a mortgage is usually higher than the amount of interest accrued on savings
- Offsetting might not be worthwhile if you only have a small amount of savings. However, if you intend to make regular monthly savings an offset mortgage can still allow you to save money on your mortgage over time.
- Larger deposits may be needed for offset mortgages because the loan to value ratio (LTV) can be lower than for a standard mortgage
How to offset your savings against a mortgage
If you’re applying for an offset mortgage from scratch, you will need to find an offset mortgage bank, building society or other type of UK lender that offers these products, as not all providers do. You will then need to convince your lender of choice that you meet their criteria.
However, if you already have a mortgage and wish to offset your savings against it, you will need to remortgage to an offset deal, either with your current lender or another provider. Both your savings account and mortgage would usually need to be with the same lender.
How to get an offset mortgage
As we’ve already touched on, you can’t just approach any lender as not all of them offer offset mortgages, nor should you make multiple enquiries as this can harm your credit rating.
The best way to get a mortgage loan with an offset savings account is through a broker with access to the entire market. That way, all of the best deals you qualify for will be within reach. The experts we work with are whole-of-market and can provide you with bespoke offset mortgage and advice and help you find the right lender for your needs and circumstances.
Offset mortgage eligibility criteria
If you’re applying for an offset mortgage from scratch, you will need to meet the lender’s standard eligibility criteria.
Most providers will assess you based on the following factors…
- Your income and employment situation: Most UK providers cap their lending based on x4.5 the borrower’s income, others x5 and a minority stretch to x6. Those who are self-employed or earn a significant portion of their income through things like benefits, commission, overtime and bonuses might need a specialist lender.
- The property type: A specialist lender might be called for if the property you’re buying has elements of non-standard construction (e.g. thatched roof, timber frame). You can read more about non-standard construction mortgages here.
- Your credit rating: Some lenders won’t cater for customers with bad credit, but a specialist provider may still offer you a deal, depending on the age and severity of your credit issue(s). Read more about bad credit mortgages.
- Your age: Some lenders won’t offer mortgages to anyone over 75, others go up to 85, and a minority will lend to a pensioner of any age, as long as they’re convinced they can keep up with the mortgage payments during their retirement years.
- Your outgoings: Significant outgoings such as unsettled loans, car finance and dependent children might affect the amount you can borrow.
- Your deposit: How much you have and where it came from will also be a factor. Moreover, offset mortgages can have specific deposit requirements – see the section below for more information about this.
What other requirements are there for offset mortgages?
As well as passing the lender’s standard mortgage eligibility criteria, there are also specific requirements for offset mortgages that you will need to meet. Including…
- Your savings account and mortgage will usually need to be with the same lender
- Most offset mortgages have higher deposit requirements than standard home loans
How much deposit do I need for an offset mortgage?
For a standard residential mortgage, it’s possible to find a lender who will offer you a loan with just 5% deposit, although others will ask for more, especially if there’s any risk to the deal.
However, offset mortgages are usually offered with a lower loan to value ratio (LTV), so deposit requirements are often higher. Most offset mortgage providers will expect you to put down at least 25% deposit, and others might ask for even more than that.
That said, a minority offer 80-90% LTV offset mortgages, but in some cases only to an existing borrower who is switching to an offset mortgage with them.
Can I get a 100% offset mortgage?
Offset mortgages usually come with higher deposit requirements, so convincing a lender to offer you one with a 100% loan to value (LTV) ratio will be difficult.
However, there is another type of product that can help you get on the property ladder without a deposit – guarantor mortgages. These deals involve a family member (some lenders allow close friends too) either securing a property they own against your mortgage, or placing a lump sum of equal value to the deposit in an account held by the lender.
The only potential stumbling block is that you need to have a close friend or family member who’s willing to support your mortgage application(obviously).
You can read more about guarantor mortgages here.
Offset mortgages FAQ
Still don’t know the meaning of the term ‘offset mortgage’ or are looking for more information on them? Don’t worry – this FAQ section contains further details on these products.
Do offset mortgages still exist in 2019?
Yes, absolutely, but not all lenders provide them, which is why you should use a whole-of-market broker to find the one best positioned to offer you a favourable offset deal.
What is the difference between a repayment and an offset mortgage?
The main difference is that with a repayment mortgage, the monthly interest you pay will be based on the entire loan amount that’s outstanding. With an offset mortgage, you will only pay interest on the difference between the loan amount and the sum in the linked savings account.
The other thing that differentiates offset mortgages is that interest rates and deposit requirements can be higher.
What is the definition of a flexible offset mortgage?
Some lenders use this term for their offset mortgage products where the borrower has the right to access their savings and draw down on their over-payments. There are certain lenders who will charge a higher interest rate for giving customers these options.
What is the definition of a fixed offset mortgage?
Some lenders might use this terminology for a fixed rate offset mortgage.
Like standard mortgages, offset home loans can be either fixed rate – where the lender offers you a discounted rate for a set number of years (usually two, three, five or 10) before moving you onto their standard variable rate, unless you remortgage before then – or tracker rate, which means the amount of interest you pay will be based on the Bank of England’s base rate.
Can I offset a commercial mortgage against a business account?
Yes, this may be possible as there are specialist lenders who allow borrowers to offset a commercial mortgage against a company account, although the business account and the mortgage will need to be with the same lender in most cases.
You will struggle to find a lender who will be okay with you offsetting a residential mortgage against a company account, but there may be other options available. Make an enquiry and one of the expert brokers we work with will break them down for you.
Can I get an offset mortgage using Limited Company funds?
Again, you will struggle to find a lender who is willing to let you use Limited Company capital to offset a residential mortgage against, but workaround solutions might be available. Get in touch and a specialist broker will outline all of the options available to you.
Can I get an offset pension mortgage?
You may run into difficult if your plan is to use your pension to offset against your mortgage as offset mortgage lenders usually only allow you to link accounts that you hold with them.
However, there are offset mortgages for over 65s available as (providing they have a lump sum to link to their home loan) as most providers have no problem catering for this age bracket.
Can I get a fee free offset mortgage?
There are usually additional fees pay with mortgage applications, such as arrangement fees and legal costs, so finding a fee free offset mortgage is unlikely.
However, finding a low fee offset mortgage or one with minimal upfront costs is possible. The brokers we work with only charge on success, so they will refund any upfront charges if they’re unable to arrange a mortgage for you – make an enquiry to speak with one today.
Can I get an offset mortgage through Help to Buy?
There’s no guarantee that you’d be able to get a Help to Buy offset mortgage as people with substantial savings wouldn’t usually apply through the government scheme. It’s theoretically possible, but most lenders would likely decline an application of this nature.
That said, there may be more viable options available if you’re a first time buyer with your sights set on an offset mortgage. Get in touch and an expert will go over them with you.
Can I get an offset mortgage if I’m self employed?
Yes, it’s possible to get an offset mortgage if you’re self employed or work as a contractor, but finding a specialist lender is essential.
Self employed applicants can apply for many of the same mortgage products as those in full time employment, but the way the lender treats your income, and how long they will expect you to have been trading in a freelance capacity for, will vary across the market.
To find the most favourable deal, you will need to find a lender who will allow you to declare as much of your earnings as possible and pass their eligibility checks. With specialist advice from a whole-of-market broker, you will stand the best chance of finding such a lender.
Can I get an offset mortgage for a second home?
There’s no reason why not, as most lenders do not specify that offset mortgages are exclusively for primary residences. The only real difference is that loan to value (LTV) caps, and income and affordability checks can be more stringent if you’re using an offset mortgage to buy another property. Bad credit on your file could also be more restrictive, so be sure to seek specialist advice before proceeding.
Are there offset mortgages for expats?
It could be possible as a minority of lenders offer offset mortgages for expats. However, expat lending is considered a niche area and not all mortgage providers cater for this demographic, while others won’t give you their best rates since they consider these deals risky.
However, it may be possible to find a favourable deal if you use a whole-of-market broker. Get in touch to speak with one of them over the phone today.
What are the tax implications of an offset mortgage?
There may be tax benefits to taking out an offset mortgage, depending on how much you have in your savings account. Interest on savings is taxed once you earn more than a certain amount, but the money you can save with an offset mortgage is not taxed. Therefore it may be more cost effective for higher rate and additional rate taxpayers to place their money in an offset account because they would pay more tax on their savings.
Can I have an offset mortgage with multiple linked accounts?
Yes, in theory. Some lenders will let you link a current account or a joint account (if you’re applying for the mortgage as a joint applicant with somebody else) to an offset mortgage, as long as said accounts are held with the mortgage provider.
Can I get a short term offset mortgage?
Offset mortgage terms are usually no different to those of standard residential mortgages, so it’s not uncommon for a borrower to take one out over 25-30 years.
However, many customers choose to reduce their offset mortgage term by making over-payments. As you would be saving on interest each month, you might find that you’re in a position to do this, and therefore you’d be making your mortgage a shorter term debt.
Be sure to check whether you’d be liable for any early repayment fees first, though.
Can I get an offset professional mortgage?
Absolutely, in fact one of the market leaders in Offset mortgages offers ‘professional’ mortgages with offset facilities exclusively aimed at those employed in the following capacities…
- Medical doctor
- And more
For rates, terms and further information about professional offset mortgages make an enquiry and the advisors we work with will talk you through them and help you find a lender.
Will my savings be protected if I take out an offset mortgage?
The Financial Services Compensation Scheme (FSCS) guarantees protection for up to £85,000 of your savings, so you would get that amount back if your lender went into administration. Anything over that amount does not have FSCS protection, but if you’re concerned about this, get in touch and the advisors we work with will explore how you can minimise the risk.
Can I get a large offset mortgage?
Yes, it may be possible as some lenders offer large offset mortgages. The only real difference with large loans is that loan to value caps and affordability checks are more stringent and adverse credit can be more restrictive.
Speak to an offset mortgages expert
Still asking “what are offset mortgages” and want to speak to an expert for the right advice? Call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.