What is an offset mortgage and what are the best deals?

Interest rates on savings are pitifully low at the moment. But you can still put your money to work: get an offset mortgage. Saloni Sardana explain what they are and picks the best deals on offer now.

Offset-mortgages have been around for more than a decade, but few people are aware of them. But as interest rates rise, mortgages will get more expensive. An offset mortgage can help. 

An offset mortgage links your mortgage loan to your savings account and “offsets” the two, meaning you only pay interest on the difference. 

For example, ordinarily, if you have a £500,000 mortgage and £30,000 in your savings account, you pay interest on £500,000 at whatever interest rate your mortgage is at, and receive interest on the £30,000 savings.

But with an offset mortgage, you offset the £30,000 savings and forgo the interest, and pay interest only on £470,000 of the £500,000 loan. 

It is worth noting that the offset mortgage only lowers the amount of the mortgage to which you pay interest, it doesn’t lower the actual mortgage amount. 

What are the pros and cons of an offset mortgage?

With an offset mortgage, you can either reduce your monthly payments or pay off your loan early, but you still have access to your savings. Offset mortgages can also be attractive to higher and additional-rate taxpayers, because savings interest would ordinarily be liable to tax.This is not the case with an offset mortgage because the savings used to offset the mortgage do not pay interest.

On the flipside, offset mortgages are typically more expensive and have a lower loan-to-value ratio (LTV), meaning such loans typically require higher deposits. 

But according to David Hollingworth of L&C Mortgages, while offset mortgages are useful, you should first check on how much of your mortgage you are willing to offset before deciding whether an offset mortgage is for you. “If you just need a small amount of overpayment and have only a very small proportion of the mortgage amount in savings you may be better served with a more traditional deal,” he says 

These are the lenders that offer offset mortgages according to UK-based price comparison website Uswitch

  • NatWest
  • Barclays
  • Lloyds
  • Nationwide
  • Royal Bank of Scotland
  • TSB 
  • Halifax
  • Accord Mortgages
  • HSBC
  • Virgin Money 
  • Chelsea Building Society 

The best offset mortgage deals

These are the top fixed two-year offset remortgage deals, assuming a £400,000 loan on a property worth £500,000 with 15 years outstanding on a repayment mortgage plan, according to Uswitch data. 

Barclays offers an initial fixed rate of 3.19% over 25 months, which would imply a monthly cost of £2,799 over 25 months. There is a £999 fee and it has an annual percentage rate of charge (APRC) of 4.4%. The APRC shows the total cost of a mortgage, including fees, for the full duration of the mortgage. 

Chelsea Building Society offers an initial fixed rate of 3.25% over 26 months, which implies a monthly payment of £2,811 over 26 months. It has a fee of £495 and an APRC of 4.3%. 

Lloyds Bank charges an initial rate of 3.25% over 25 months, with a fee of £1,499, which implies a monthly cost of £2,811. It has an APRC of 4.3%. 

Virgin Money offers a fixed rate of 3.25% over 26 months, implying a monthly cost of £2,811 over 26 months. There is a fee of £999 and an APRC of 5%. 

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