Offset mortgages, described as 'hugely underused' by brokers, could be an ideal solution for borrowers with significant savings. These products allow homeowners to link their savings to their mortgage, reducing the interest charged on the outstanding balance while keeping savings accessible.
Offset mortgages first emerged in the late 1990s but lost popularity after the financial crisis and a period of low interest rates. However, with rates rising again, brokers argue they deserve a comeback. Hannah Vandervennin of The Mortgage Consultancy said, 'Offset isn't underloved by borrowers, it's been abandoned by lenders.' She noted that only two mainstream lenders still offer them to new borrowers.
How Offset Mortgages Work
With an offset mortgage, the lender deducts the savings balance from the mortgage balance before calculating interest. Borrowers keep full access to their cash while effectively earning a return equal to their mortgage rate, often tax-free. This makes them particularly attractive for the self-employed, higher earners, and those with variable incomes.
Benefits and Drawbacks
Nouran Moustafa of Roxton Wealth highlighted that many borrowers don't understand offset mortgages. 'Most people ask what is the cheapest rate rather than how can my mortgage and savings work together,' she said. The flexibility is a key benefit, but the headline rate may not always be the lowest, and the advantage diminishes without sufficient savings.
Philly Ponniah of Philly Financial noted that offset mortgages work well for barristers who hold large sums for tax payments. 'Rather than leaving cash in a standard savings account, they can reduce mortgage interest while keeping it accessible,' she explained. However, borrowers need substantial savings for the arrangement to be worthwhile.
Limited Availability
Aaron Strutt of Trinity Financial said only about five lenders currently offer offset mortgages, including Accord Mortgages, Barclays, and Coventry for Intermediaries. Scottish Widows Bank, once the biggest provider, exited the market in 2023. 'With so many homeowners making overpayments, offset mortgages should be more popular,' Strutt added.
Thomas Boughton of Artillium Real Estate Finance noted that many borrowers have never heard of them. Scott Taylor-Barr of Barnsdale Financial Management said they remain popular among barristers, who use them to save for tax liabilities while reducing mortgage interest.
In summary, offset mortgages are a powerful but overlooked tool. For the right borrower, they offer a smart way to cut interest costs without locking away savings. However, the limited number of products and higher interest rates mean they require careful consideration.
