Borrowers flush with savings could save thousands of pounds on their mortgage by using their cash to lower their interest payments.
Offset mortgages let you link a savings account to your mortgage. The money you have in your savings account is “offset” against your loan, so you pay interest only on the difference between your savings total and the size of your mortgage.
Experts say there has rarely been a better time to use an offset mortgage. Interest rates on savings are at record lows; we have saved an extra £190 billion during the pandemic and hundreds of thousands of borrowers are expected to seek new deals this autumn.
Accord Mortgages, which is part of Yorkshire Building Society and accounts for £26.6 billion of UK mortgages, said there had been a rise in the volume and value of offset applications compared with last year. Offset mortgages are particularly good for higher and additional-rate taxpayers, who pay more tax on any interest earned in a bank account, and self-employed workers, who can use an offset mortgage to make the most of savings they have put aside for their next tax bill.
They can also work well if you get regular bonuses which can be easily added to your savings account to reduce your interest bill. They are often the deal of choice for mortgage brokers.
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Lenders are expecting a remortgaging boom as £29 billion of loans come to the end of their fixed term in October, according to Caci, a market analyst. While borrowers are often put off by the more complicated set-up and typically higher rates of an offset mortgage, they are not as complex as you might think. Here’s what you need to know.
How it works
An offset mortgage lets you link a savings account to your loan. Your savings do not earn any interest, but you do not pay interest on an equivalent amount of your mortgage.
If you have a £200,000 mortgage and £50,000 in a linked savings account, you will pay interest only on the £150,000 part of the loan which exceeds your cash savings total.
Your savings do not pay off any of your mortgage, so you still owe the money, but it will lower the overall cost of your loan. You can access your cash savings at any time, but your monthly mortgage payments will go up if you do.
Nick Morrey, product technical developer at the mortgage broker John Charcol, said: “Offset mortgages have never been of better value. They are a niche product and often misunderstood, but can be extremely helpful for the borrowers they are right for.”
The maths
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When using an offset mortgage, you can usually choose whether to reduce your monthly payments or to keep them the same and pay off your mortgage sooner. For example, take a higher-rate taxpayer with a 25-year £300,000 mortgage at 1.72 per cent and a £50,000 savings account linked to the loan.
They could save £23,600 in interest if they kept their monthly payments the same and would be rid of their debt one year and six months earlier than planned. But if they reduced their monthly payments instead, they would save about £20,000 in interest payments over 25 years.
Offset mortgages give “huge flexibility” for borrowers, according to Dan White, a director at the mortgage broker Champion Hall and White. He said: “If a borrower is looking to overpay on their mortgage, an offset mortgage gives them an easy way to do it and has the advantage of not being permanent. If they then suddenly needed the money, they would not have to remortgage or make another borrowing application.
“Instead of getting incredibly low savings rates they can use their savings to reduce interest on their mortgage.”
Should I get an offset?
Anyone can apply for an offset mortgage. The process works the same way as a regular mortgage, so you will be subject to the same affordability criteria and the property the loan is secured against will go through the same checks.
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You will also have to prove that you can afford the mortgage and repayments if you had no savings linked to the loan, so it is not a route to securing a larger mortgage.
It is most suitable for you if you have large cash savings that you want to remain accessible, and have a mortgage set at a higher rate than you can get on a suitable savings account. They are particularly useful for higher-rate taxpayers, who pay 40 per cent on any savings interest earned outside an Isa.
If a higher-rate taxpayer put £50,000 in a savings account at 1 per cent a year, the net return is 0.6 per cent after tax, giving you a £300 annual boost. But if you offset the £50,000 against a £100,000 mortgage at 1.5 per cent, you would lower your interest bill from £1,500 a year to £750. The £750 saving is £450 more than you would have made in your savings account.
A lower-rate taxpayer would save £50 a year in the same scenario.
Offset mortgages are also helpful for self-employed workers who put aside the money they will pay in tax throughout the year.
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If a self-employed person earned £2,000 a month, but wanted to put £500 of it away each month to save up for their tax bill, an offset mortgage allows them to make their money work for them during the lag between earning the money and paying the tax.
They may not be suitable for everyone, however, so always take advice if you are not sure.
Where to look
Not all lenders offer mortgage products with the ability to offset your savings against your interest payments, so you must choose from a limited range of mortgages available to you. The main providers of offset mortgages are Scottish Widows, Coventry Building Society, Clydesdale Bank, part of Virgin Money, and Accord Mortgages.
They are also available at the Family Building Society, Beverley Building Society, Melton Building Society and Hinckley & Rugby. Barclays offers a tracker offset mortgage, but just for remortgaging borrowers.
The best rate comes from Scottish Widows at 1.19 per cent fixed for 28 months, for those remortgaging with at least 40 per cent equity or deposit, available through mortgage brokers.
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Coventry Building Society offers 1.25 per cent for 26 months for those remortgaging and those purchasing a new property with at least 50 per cent deposit or equity — although it is not available to first-time buyers.
Beverley Building Society offers a 1.52 per cent two-year fixed rate for remortgaging borrowers with 65 per cent deposit or equity, and a 1.82 per cent two-year fix for first-time buyers with a 20 per cent deposit.
Accord Mortgages has a 2.01 per cent deal for remortgagers with 25 per cent equity, fixed for 27 months. It is only available through brokers.
Read Times Money Mentor’s guide to paying off your mortgage early
‘I not only save money, I’ll pay off the mortgage 3-4 years early’
The mortgage broker Andrew Montlake, above, is a big fan of offset mortgages, taking out one himself in 2017 (Imogen Tew writes).
Montlake, 51, the managing director of the mortgage advice firm Coreco, has a £400,000 loan on a three-bed semi-detached house in Radlett, Hertfordshire, where he lives with his wife and children Lila and Rafi, pictured.
When his father died in 2016, he came into an inheritance and decided to use the funds to lower his repayments.
He said: “As a broker, I’ve always thought that offset mortgages are criminally under-used and they have always interested me. The beauty of it is that I still have access to my money, so it’s not like I’m investing it, but the fact I can offset it against my mortgage means it works well for me.” Montlake remortgaged in 2017, choosing a five-year fix at 1.99 per cent from Scottish Widows. He has £100,000 in a linked savings account, so he pays interest only on the mortgage not “offset” by these savings.
“It will save me hundreds if not thousands of pounds over the mortgage. If I didn’t have an offset, the savings would just be sitting in a normal bank account which doesn’t really earn me anything, and I’m taxed on it.” He is using his offset mortgage to pay off his loan more quickly. He kept his monthly payments the same, and because less of the payment is being used to pay the interest, more goes towards repaying the capital.
He expects to be mortgage-free three to four years sooner than he would have been without the offset — and he will still have his £100,000.
“If you invest the money, you take some risk. If you leave it in a normal bank, you’re getting next to nothing,” said Montlake. “My mortgage is my biggest debt, so the quicker I can pay that off, the better.”
Montlake urged borrowers with significant savings who are looking at remortgaging to consider offsets and to ask their mortgage broker or lender if they would be suitable.
Read Times Money Mentor’s guide to paying off your mortgage early
