Offset Mortgage
How Do Offset Mortgages Work?
Offset mortgages are relatively new to the UK market but are increasing in popularity, especially for those who are keen to see their money work as hard as possible and who have at least £10,000 in savings.
An offset mortgage takes all your finances and puts them into one pot. Amounts taken from a current account, mortgage, savings and personal loan account are compiled and offset against each other. An offset mortgage adds up all of your assets including savings, plus your salary in your current account, and offsets them against your debts, eg mortgage, overdrafts, loans.
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| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Fixed (no tie-in beyond benefit period) | ||||||
| First Direct Offset | 5.49% | 2 years | 6% | 80% | No Overhang |  |
| Alliance & Leicester Prime | 6.14% | To Aug 2010 | 7.19% | 75% | No Overhang | |
| Derbyshire BS (Direct) | 6.79% | To Sep 2018 | 7.09% | 90% | No Overhang | |
| Fixed (with tie-in beyond the benefit period) | ||||||
| Market Harborough BS (Direct) | 3.99% | 2 years | 7.15% | 75% | Overhang | |
| Capped | ||||||
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Light Adverse Payment History | ||||||
| Skipton BS | 6.19% | To Aug 2018 | 6.45% | 75% | No Overhang | |
| Ipswich BS | 6.49% | To Aug 2011 | 7.24% | 80% | No Overhang | |
| Medium Adverse Payment History | ||||||
| Heavy Adverse Payment History | ||||||
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Discount (with tie-in beyond the benefit period) | ||||||
| Discount (no tie-in beyond benefit period) | ||||||
| HSBC Bank plc (Direct) Purchase | 5.43% | 2 years | 6.25% | 90% | No Overhang | |
| Mansfield BS (Direct) | 5.65% | 3 years | 7.19% | 75% | No Overhang | |
| Barnsley BS (Direct) Branch only | 5.69% | 2 years | 7.19% | 85% | No Overhang | |
| Market Harborough BS (Direct) | 5.95% | Term | 7.15% | 75% | No Redemption | |
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| HSBC Bank plc (Direct) Purchase | 5.43% | 2 years | 6.25% | 90% | No Overhang | |
| First Direct Offset | 5.49% | 2 years | 6% | 80% | No Overhang | |
| Alliance & Leicester Prime | 5.89% | 2 years | 7.19% | 75% | No Redemption | |
| Market Harborough BS (Direct) | 5.95% | Term | 7.15% | 75% | No Redemption | |
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Direct Line | 6.39% | To Jun 2010 | 6.5% | 95% | No Overhang | |
| Bank of Ireland 1st Start | 6.99% | To Jul 2013 | 7.09% | 95% | No Overhang | |
| Bristol & West Mortgages First Start | 7.19% | To Jul 2013 | 7.09% | 95% | No Overhang | |
| Coventry BS | 7.39% | To Sep 2013 | 7.09% | 95% | No Overhang | |
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Barnsley BS (Direct) BTL | 6.19% | 3 years | 7.19% | 75% | No Overhang | |
| Principality BS Buy to Let | 6.39% | To Jun 2010 | 7.09% | 60% | No Redemption | |
| Lloyds TSB BTL (Direct) | 6.54% | To Aug 2011 | 7% | 80% | No Overhang | |
| National Counties BS Investment | 6.79% | To Aug 2013 | 7.35% | 75% | No Overhang | |
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Market Harborough BS (Direct) | 6.1% | Term | 7.15% | 75% | No Redemption | |
| Scottish Widows Bank Offset | 6.29% | 2 years | 6.49% | 75% | No Overhang | |
| Yorkshire BS (Direct) | 6.54% | To Jun 2013 | 6.9% | 75% | No Overhang | |
| Lender | Rate | Duration | Standard Rate | Max LTV | Tie in | Proceed |
|---|---|---|---|---|---|---|
| Mansfield BS (Direct) | 5.9% | 2 years | 7.19% | 75% | No Overhang | |
| Principality BS Direct | 5.99% | To Jun 2010 | 7.09% | 75% | No Overhang | |
| HSBC Bank plc (Direct) Fee Free | 5.99% | Term | 6.25% | 90% | No Redemption | |
Say you have a mortgage of £100,000 and savings of £10,000, and have a monthly balance of £2,000 in your current account when you get paid.
Rather than paying, say, 5% interest on a mortgage, earning just 3% on your savings and 0% on your current account, the offset calculates that you have debts of £88,000. Therefore interest incurred will be on the £88.000 as opposed to the £100,000 borrowed on your mortgage. As interest rates for mortgages and loans are much higher than savings and certainly higher than current account rates, it is wise to avoid paying interest on the £12,000, which was part of your mortgage sum, and instead earn interest on it as an asset.
Offset Mortgage Benefits
Tax Advantages
An offset mortgage offers tax advantages, especially to those in the a higher tax bracket, as you will not pay tax on the reduced interest you pay. So, rather than receiving, say, 3% on your savings after tax, you can actually save interest of 6% on your mortgage. Although initiaially your money may have been in a savings account, therefore liable to tax, it is not treated as such once compiled with other assets for the purpose of an offset mortgage.
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Self-Employed
Offset mortgages can be of particular benefit to the self-employed, or those who receive significant annual bonuses. The self-employed are usually victims of unfavourable mortgage terms, but by putting money reserved for tax into an offset savings account, self-employed homeowners can have their cash working against the mortgage debt. Also, paying large annual bonuses into an offset mortgage can substantially reduce your mortgage debt.
Savers
People set to reap the richest rewards from an offset mortgage are those with at least £10,000 in savings. As a general rule, £10,000 for every £100,000 of debt is needed to make an offset mortgage work to your fullest advantage.
Payments
With some of these mortgages you can make underpayments – if for example you have an unexpected expense one month, you can pay less off your mortgage. Similarly, if outgoings in one month have been lower than expected or there has been some additional income, in most cases over-payments can also be made.
Payment holidays may also be available where you pay nothing for a month or so.
Offset Mortgage Disadvantages
Complicated Mortgage Arrangement
Offset mortgages can appear complicated to anyone who does not have a head for figures and can seem disconcerting to someone who likes to separate their finances.
However, with an offset mortgage, you keep your mortgage, savings and current account balances in separate accounts where the amounts are offset against each other.
Savings
For the offset mortgage to pay the biggest dividends and substantially reduce mortgage debt, there must be around £10,000 for every £100,000 of debt. In addition, savings must be left untouched for the duration of the mortgage in order for them to be calculated against the total debt.
High Mortgage Rates
Offset mortgage rates have tended to be uncompetitive in the past, with rates of 1% more than the best fixed rate mortgage. There has been some improvement, however, in this area in recent times and it is possible to obtain an offset mortgage at less than 5%.
Our Advice
Compare offset mortgage offers on our comparison tables for the best buy mortgage deals. We also have a list of the UK’s main mortgage providers in our A-Z directory, where we can help connect you with the best mortgage lenders. Alternatively, perhaps you have had an experience with a mortgage lender which you would like to share, if that’s the case don’t leave without visiting our Forum. Our Forum is the place to leave a message and see what other visitors have to say about mortgage providers and their products.
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