A guide to offset mortgages in the UK
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Countless customers get in touch to ask us about offset mortgages. Many of them want to know exactly what they are, others are wondering how they can get one, and some simply want more information about these products – so we’ve put together this comprehensive guide.
You’ll find the following topics covered below…
An offset mortgage is a product that lets you link a savings account to your mortgage to reduce the amount of interest you pay on the home loan. Instead of earning interest on your savings, you will only pay interest on the mortgage balance minus the amount of savings you have.
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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.
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.
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.
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.
To answer this question, you should make yourself aware of the main advantages of an offset mortgage and weigh them up against the disadvantages.
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.
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.
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.
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…
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…
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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…
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.
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.
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.
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.
Looking for specialist advice? Read through our articles about off-set mortgage situations and how best to prepare yourself to find the right mortgage for you.
A Guide To Offset Mortgages
Offset Mortgages - Pros and Cons
Family Offset Mortgages
Fixed Rate Offset Mortgages
Offset Mortgage Rates
Current Account Mortgage
Offset Mortgage Providers
Offset Tracker Lifetime Mortgages
*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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