The number of lenders offering offset mortgages is shrinking, but borrowers can still find competitive deals if they’re keen to keep interest costs down.
Clydesdale Bank (part of Virgin Money) this month became the latest lender to withdraw from the offset mortgage market, joining Family Building Society, First Direct and Scottish Widows Bank. However, several lenders, including Barclays, Coventry Building Society and Yorkshire Building Society, continue to offer offset mortgages to new customers.
Even though there are fewer deals available, if you have a decent savings pot, an offset mortgage could still be worth considering if you want to reduce the cost of what’s likely to be your biggest monthly outgoing.
Offset mortgages explained
Offset mortgages, as the name suggests, allow you to link your savings to your mortgage balance. Instead of earning interest on your savings, the money in your savings account is used to reduce the amount of your mortgage that you pay interest on.
The more savings you have available to offset, the greater the benefit. For example, if you have a £150,000 and £30,000 in savings, with an offset mortgage, you’d only pay interest on £120,000. With £50,000 in savings, you’d pay interest on £100,000 instead.
You can still take your savings out at any time, and as they aren’t earning any interest, there’s no tax to pay on them, which can be especially helpful for higher and additional rate taxpayers.
Some lenders will give you the choice of using your offset savings to either reduce your monthly payments or keep the payments the same and shorten the mortgage term. This can be a big help if your income varies or you want to pay your mortgage off early.
Offset deals tend to be most attractive when mortgage rates are relatively high but savings rates are low, as your savings effectively “earn” the same rate as your mortgage interest.
If you’re not sure whether an offset deal is right for you, it’s worth speaking to a mortgage broker who can calculate the potential savings. Those with only a small amount of savings may find that a lower standard mortgage rate offers better value than an offset arrangement.
