Five-minute guide to... offset mortgages

Published by on 14 April 2011.
Last updated on 13 May 2011

What is an offset mortgage?

An offset mortgage uses any savings you hold with the same bank to bring down the interest payments on your mortgage.

However, it's not just the money in your savings account that you can use to offset your mortgage: some lenders will take into account the money in your current account as well (even when it's held with them).

Is it right for me?

An offset mortgage will only work if you have substantial savings to pay in - usually at least 10% of the value of your property. If you have less, then this sort of mortgage won't be worth your while.

An offset mortgage is great if you're self-employed and receive a sporadic income. It means you can use the overpayment facility when you have cash to spare, and pay less when you don't.

What are the typical rates for offset mortgages?

The rates are usually not much different from those of mainstream mortgages. Currently, Woolwich has a lifetime tracker at 2.49% over base rate, giving a pay rate of 2.99% at 70% loan to value.

This is available as a normal or an offset mortgage; the former has a £1,499 fee, the latter a £999 fee. Check out our mortgage round-up for the best rates.

How much can I save by using an offset mortgage?

The amount you can save depends upon on the value of your savings.

For example, if you have a £200,000 mortgage and £50,000 in savings, you will only pay interest on the difference - in this case, £150,000.

According to Melanie Bien, director of independent mortgage broker Private Finance, with a rate of 4.5%, this would equate to knocking five years and six months off a 25-year term. Alternatively, you could reduce your monthly payments by £188 to £924 a month.

Can I still access my savings?

An offset mortgage is an extremely flexible way of borrowing: it allows you to access your savings whenever you need to, but at the same time any remaining savings will continue working to reduce the interest on your mortgage.

Are there any downsides I should be wary of?

The main disadvantage of an offset mortgage is that your savings will not garner any interest. In the current super-low interest-rate environment, that should not be a problem.

However, on the chance that interest rates may rise significantly in the future, you may prefer to keep your savings in a high-interest savings account instead.

Help! I need to use my savings, do I have to change mortgage?

If you have an offset mortgage but have to use all your savings, you don't have to change your mortgage. Your offset mortgage will sit alongside your savings, and since rates aren't all that different between offset and non-offset mortgages, it may be worth just staying put and attempting to build up your savings again.

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