How do offset mortgages work?

David Lauder, Independent Mortgage Adviser at ESPC Mortgages, gives an overview of offset mortgages.

There are many different mortgage products to choose from and one of the most powerful options to save money is offset mortgages as it means your money will be working harder for you.

How does it work?

Your outstanding mortgage balance is offset by your savings balance which is required to be with your mortgage provider in a separate account arranged by your lender, and you only pay interest on the surplus balance of the mortgage instead of the full amount.

For instance, if your mortgage is £100,000 and you have £50,000 of savings then you will only be charged interest on the £50,000 surplus balance of your mortgage. However, if you continue to make the required payments based on the full £100,000 balance then your mortgage will be repaid even quicker.

In essence, these will be treated as overpayments, and the interest payable will be considerably less during the mortgage term. You will also still have the option to pay in lump sums if you prefer to the mortgage balance, however, the offset savings account is doing the same thing, as the total balance is aggregated against the mortgage debt.

Who can set up an offset mortgage?

You may need to be at a certain stage of your financial life to be suitable but professionals, high net worth clients or people who are disciplined with their money and have a good month-to-month surplus which continues to build up could certainly find this a suitable solution.

It is worth noting that your savings in the offset facility will accrue no interest but are, in essence, tax-free which is an added bonus. In the current climate, an offset mortgage can be a good option when mortgage rates are higher and means your money is working harder to reduce the level of interest accrued against these increased rates.

ESPC magazine

This article appeared in the May 2023 issue of the ESPC magazine. Find out more about the ESPC magazine and read the latest issue online. 

The initial consultation with an ESPC Mortgages adviser is free and without obligation. Thereafter, ESPC Mortgages charges for mortgage advice are usually £395 (£345 for first-time buyers). YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED AGAINST IT.

The information contained within this website is subject to the UK regulatory regime and therefore restricted to consumers based in the UK.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren’t able to resolve themselves. To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

ESPC (UK) Ltd is an Appointed Representative of Lyncombe Consultants Ltd which is authorised and regulated by the Financial Conduct Authority.