An offset mortgage links your savings account (and sometimes your current account) to your mortgage. Instead of earning interest on your savings, your savings balance is deducted from your outstanding mortgage balance for the purpose of calculating interest. You still owe the full mortgage amount, but you are only charged interest on the difference.
For example, if your mortgage is £200,000 and you have £30,000 in savings, you only pay interest on £170,000. Your savings remain accessible — you can withdraw them at any time — but the more you keep in the linked account, the less interest you pay on your mortgage.
Offset mortgages can be particularly tax-efficient for higher-rate and additional-rate taxpayers, because reducing mortgage interest is effectively a tax-free return on your savings. They also suit people who want to keep their savings accessible rather than locking them into overpayments. However, offset mortgage rates are sometimes slightly higher than the best standard deals.
You have a £250,000 mortgage at 4% and £50,000 in a linked savings account. Instead of paying interest on £250,000 (£10,000 per year), you pay interest on £200,000 (£8,000 per year), saving £2,000 annually. Your savings earn no interest, but the £2,000 saved on mortgage interest is tax-free — equivalent to earning 4% gross on your £50,000 savings.
Key Points
- Savings are offset against your mortgage to reduce interest charges
- You still owe the full mortgage amount — savings are not used to repay it
- Savings remain accessible and can be withdrawn at any time
- Particularly beneficial for higher-rate taxpayers
- Offset mortgage rates may be slightly higher than non-offset deals