How many lenders provide offset mortgages?

How many lenders provide offset mortgages?                                                                                      

Offset mortgages can help homeowners reduce interest, keep access to savings and potentially clear their mortgage faster

Homeowners with savings can potentially save thousands of pounds in mortgage interest by choosing an offset mortgage, although relatively few lenders still provide them.

Offset mortgages link a borrower’s mortgage to savings, and sometimes current accounts, so the savings balance reduces the amount of mortgage debt on which interest is charged. The borrower does not normally earn interest on the linked savings, but instead pays less mortgage interest.

For example, if a borrower has a £500,000 mortgage and £100,000 in linked offset savings, they would only be charged mortgage interest on £400,000. The savings remain accessible, but while they are linked to the mortgage, they do not normally earn savings interest.

At the moment, the UK offset mortgage market is relatively limited compared with the wider fixed-rate and tracker mortgage market. The most recognisable providers include Accord Mortgages, Barclays, Coventry Building Society, Yorkshire Building Society, Coutts and Handelsbanken, although product availability, pricing and criteria can change regularly.

Accord's offset range can be linked to up to three savings accounts, Barclays says offset borrowers can link eligible current and savings accounts, Coventry says its offset products can help residential clients reduce the interest they pay, and Yorkshire Building Society offers Offset Plus, allowing family and friends to link savings to the borrower’s offset mortgage.

For wealthier clients and larger mortgage borrowers, private banks, including Coutts and Handelsbanken, may also be worth considering. Coutts says its Offset Select product lets borrowers use deposits to lower interest payments, while Handelsbanken describes offset mortgages as a way to link savings to a mortgage.

Aaron Strutt, product director at Trinity Financial, says: “Offset mortgages should probably be more popular than they are, particularly now that many borrowers are holding larger cash balances and paying higher mortgage rates. They are especially useful for self-employed borrowers, company directors, higher earners, bonus earners and clients who want to reduce mortgage interest without permanently using their savings to overpay the loan.”

Which lenders offer offset mortgages?

 

Why are there fewer offset mortgage lenders than before?

Offset mortgages used to be more common, but several lenders have reduced or withdrawn their ranges in recent years. Scottish Widows Bank recently exited the new-business mortgage market, and Family Building Society withdrew its offset mortgages. Lenders are pulling these mortgages because of weak demand and the additional capital they need to hold to service these products. 

Offset mortgages can be more complex for lenders to administer than standard fixed-rate mortgages. They also require linked savings or current account functionality, and the market is smaller because many borrowers simply opt for the cheapest fixed or tracker rate instead.

However, for the right borrower, an offset mortgage can be a powerful mortgage product.

 

Example: £500,000 offset mortgage

Example: £750,000 offset mortgage

Example: £1 million offset mortgage

The bigger the mortgage and the larger the savings balance, the more useful an offset mortgage may become.

Can an offset mortgage reduce monthly payments?

Some offset mortgages allow borrowers to reduce their monthly repayments because interest is charged on a lower effective mortgage balance. Others allow borrowers to keep the same monthly payment, meaning more of the payment goes towards reducing the mortgage balance and the mortgage may be paid off faster. Offset rules may vary by lender. 

Accord says a ‘static’ direct debit amount is set up and maintained throughout the mortgage term, which effectively pays off the mortgage balance more quickly. The monthly direct debit payment will not reduce even though the registered monthly mortgage payment will. The ‘static’ payment can be amended at any time.

Who are offset mortgages best suited to?

Offset mortgages can be useful for:

• Self-employed borrowers who put money aside for tax bills.
• Company directors with retained profits or irregular dividend income.
• Higher-rate and additional-rate taxpayers who pay tax on savings interest.
• Bonus earners who receive large annual or quarterly payments.
• Homeowners with large emergency funds who want to keep access to cash.
• Parents helping children buy a property while retaining control of their savings.
• Large mortgage borrowers with £500,000, £750,000, £1 million or larger loans.

Interest-only borrowers who want to reduce monthly interest without permanently reducing the capital balance.

Offset mortgages are less likely to suit borrowers with little or no savings, first-time buyers using most of their deposit to buy a property, or customers who simply want the cheapest headline fixed rate.

 

Offset mortgage versus overpaying: which is better?

Offsetting and overpaying can both reduce mortgage interest, but they work differently.

Offset mortgages are often attractive to borrowers who do not want to lose access to savings. Overpayments can be better for borrowers who are comfortable permanently reducing the mortgage balance and do not need the money back.

Are offset mortgage rates higher?

Offset mortgage rates are often higher than the cheapest standard fixed rates. That means borrowers need enough savings to justify paying a potentially higher rate.

This is why advice is important. A borrower with £10,000 in savings may be better off with a cheaper standard fixed rate, while a borrower with £100,000 or £250,000 in cash may find offsetting far more compelling.

The right calculation depends on the mortgage size, interest rate, savings balance, tax position, product fees, early repayment charges and how long the savings will remain in the offset account.

Can you get an interest-only offset mortgage?

Some lenders offer offset mortgages on an interest-only basis, subject to their criteria and the borrower’s repayment strategy. Coventry says its offset product range includes interest-only and repayment mortgages for residential properties.

Interest-only offset mortgages can be particularly useful for larger loan borrowers who want to reduce monthly interest while keeping savings accessible. However, borrowers still need a credible repayment plan, and affordability is usually assessed on the full mortgage balance rather than the balance after savings are offset.

Can parents help with an offset mortgage?

Some lenders allow family members to link savings to a borrower’s offset mortgage. Yorkshire Building Society’s Offset Plus allows family and friends to link savings to the mortgage, while Coutts says a family member or third party can create a deposit account to offset the mortgage balance, with consent.

This can be useful where parents want to help a child reduce mortgage costs without giving away the money permanently.

Are offset mortgages good for first-time buyers?

Offset mortgages can work for first-time buyers, but usually only if they or their family have meaningful savings to link to the mortgage.

Many first-time buyers use most of their cash as a deposit, which means there may be little left to offset. In that situation, a standard fixed-rate mortgage, family-backed mortgage, guarantor-style arrangement or joint borrower sole proprietor mortgage may be more suitable.

Are offset mortgages good for self-employed borrowers?

Offset mortgages can be particularly useful for self-employed borrowers because they often hold cash for tax, VAT or business reserves.

Rather than leaving these funds in a standard savings account, they may be able to reduce mortgage interest while keeping the money available for future tax bills. The borrower must be disciplined, because withdrawing the savings will reduce the offset benefit.

Aaron Strutt says: “Self-employed clients often like offset mortgages because they can keep cash available for tax or business purposes while still reducing the interest charged on their home loan. For borrowers with larger mortgages and sizeable savings, this can be much more useful than a standard fixed-rate mortgage.”

What are the disadvantages of offset mortgages?

Offset mortgages are not perfect. The main drawbacks are:

• The interest rate may be higher than a standard fixed or tracker mortgage.
• The borrower will not normally earn interest on linked savings.
• The benefit reduces if the borrower withdraws the savings.
• There are fewer lenders to choose from.
• Some offset lenders have stricter criteria or limited product ranges.
• Not all accounts can be linked.
• The borrower may need a larger savings balance to make the product worthwhile.

Is an offset mortgage worth it?

An offset mortgage may be worth considering if you have a sizeable savings balance and want to reduce mortgage interest while keeping access to your money.

It may be particularly attractive if:

• You have a large mortgage.
• You have £50,000, £100,000, £250,000 or more in cash.
• You pay higher-rate or additional-rate tax.
• You are self-employed or receive irregular income.
• You want flexibility rather than permanently overpaying.
• You are considering interest-only borrowing.
• You want family members to help reduce mortgage costs.

It may not be worth it if you have limited savings, need the lowest possible monthly payment from day one, or can earn a better risk-free return elsewhere after tax.

Speak to a Trinity Financial adviser today

The mortgage market moves fast — and the right advice can make a significant difference to the rate and deal you secure. Get in touch with our team to discuss your options.

Call Trinity Financial on 020 7016 0790 to secure a fixed or tracker offset mortgage, book a consultation, or use our appointment calendar

The information contained within was correct at the time of publication but is subject to change. It is for general information purposes and is not advice.

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