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Offset Mortgages

What is an Offset Mortgage?

An offset mortgage allows you to pay less interest on your mortgage by ‘offsetting’ any savings you have against the outstanding mortgage debt. You need to have either (or both) a savings account or current accounts with your mortgage lender so they can take into account your savings when they calculate your interest. So if you’ve got a £100,000 mortgage, and £5,000 savings, you’ll pay interest on £95,000.

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A current account mortgage offers the same benefits but the mortgage and current account are the same account. Effectively you have an enormous overdraft on your current account which is your mortgage amount.

Offset mortgages and current account mortgages can let you pay your mortgage off earlier than your full term. You pay the same monthly amount as if interest was being charged on all your borrowings so you pay off more capital with each payment due to the lower interest amount.

Offset mortgages and current account mortgages often have flexible features, such as allowing overpayments, underpayments, payment holidays and the ability to withdraw funds.

Who Are They Suitable For?

An offset or current account mortgage may be for you if your number one financial priority is paying off your mortgage, and are prepared to have no growth on your investments.

If you want the opportunity to pay off your mortgage earlier then an offset or current account mortgage may be suitable. It can also save you thousands of pounds over the term of the mortgage.

If you want a single home for your finances, these types of mortgages may be for you.

You’ll need to have a regular income to be offered a mortgage so if you use this as part of your offset you save a lot of money on interest over the course of your mortgage.

For the best current deals for around compare offset mortgages best buys.

What Should You Look Out For?

• You earn no interest on the savings that are offset against your mortgage so you need to see what the interest rates on savings are compared to offset mortgage rates to make sure you’ll be better off. Historically loan rates have been higher than savings rates generally, but more recently you can get more on your savings, so it’s worth looking around.
• Make sure interest is calculated daily rather than monthly so you squeeze every penny of benefit from your offset savings. 
• Interest rates tend to be variable, and a little higher than standard mortgages, so make sure you can afford the repayments.
• In the very unlikely event that your lender becomes insolvent, you can normally only get up to £48,000 compensation from the Financial Services Compensation Scheme. So if you credits in an offset are above this, they are not fully protected.

Make sure you understand the key factors to consider when you’re sorting your mortgage out, these will help you to be certain that you’re thinking about all the key questions to ask yourself.

Moneyfacts.co.uk has a range of guides on other types of mortgages from variable rate mortgages, discounted rate mortgages, first time buyer mortgages to, self certification mortgages and buy to let mortgages.