An offset links a mortgage to your savings and the balance of your savings is used to reduce the amount of interest charged on the mortgage.
The value of the savings is offset on the value of the mortgage, so borrowers only pay interest on mortgage balance minus savings balance. The savings do not repay the mortgage, but it sits alongside and saves interest.
According to figures from the Bank of England, there is around £271bn currently held in savings accounts with no interest. This is an increase from 8.7 per cent rise on last year.
It also noted that households held over £1.72trn in current accounts, fixed rate bonds and cash ISAs.
Coventry Building Society’s Jonathan Stinton said that the changing economic landscape, with rising interest and mortgage rates, could make offset mortgages a key talking point for brokers, pointing to the product’s flexibility and lower payments.
He said that there seemed to be a “misguided mystification” around offset, an assumption that they were complicated, but Stinton said they were quite straightforward and operated the same way as offset products and the only difference was the savings account linked to mortgage.
Low interest rate means low interest in offset mortgages
Chris Sykes, technical manager at Private Finance, said that he thought these products hadn’t been “overly popular” as interest rates had been so low.
“It has been argued to me by many clients why would they want to pay a premium for an offset mortgage that is only offsetting at 1.5 per cent if they can make five, seven or 10 per cent in the markets,” he noted.
Jonathan Burridge, founding adviser at We Are Money, said that offset mortgages were not popular even though he “regularly discussed” the option with clients.
He explained: “Over the last decade, there were obvious benefits comparing interest rates on savings versus saving interest costs on a mortgage. Part of the issue is that these products are often priced at a premium and when you compare the savings of offsetting against standard products there is very little in it.
“Many customers do not have the cash savings available to see significant benefit. Current account mortgages are similarly unpopular. These products are valid but generally for a small cohort of clients.”
Aaron Strutt, product and communications director at Trinity Financial, agreed and said: “Offsets are not really worth taking unless you want to make use of them. If you do not put sufficient funds into the linked accounts for a long enough period, you might as well take a standard mortgage and use the overpayment facility.”
He added that the choice of offset mortgage had “reduced drastically” but were still a “decent option for some borrowers keen to make use of their savings”.
Sykes agreed that there are “not a huge amount of offset options in the market at the moment” and they often came with a premium, but with interest rates rising there could be a “large demand for them over the next few years and would love to see more lenders in this space”.
According to Criteria Brain, there are around nine lenders who can offer a residential offset mortgage and two that can offer a buy-to-let offset mortgage.
Offset mortgages expected to grow in popularity
Brokers said that offset mortgages could become more popular as the margin between borrowing costs and return on savings increases.
Riz Malik, director at R3 Mortgages, said that offset mortgages were the “last real innovation in the mortgage market” when they were introduced over 20 years ago.
He explained: “Given the growing spread between borrowing costs and the return on savings, offset mortgages could return to popularity for those with large savings balances.
“The advantage of offset is that you can benefit from saving money on your mortgage but do not lose access to the funds. The number of lenders offering offsets has diminished over recent years but used correctly can reduce the term of your mortgage.”
Malik said that it was “important to be realistic as to how much you are able to offset” as there has been a premium on offset mortgages compared to conventional mortgages.
Strutt said that for many borrowers it would be “appealing” to pay off a chunk of their mortgage but still have access to the funds in case they needed them.
He continued there had also been a shift where people want to “pay down their mortgages rather than take them out”, although he said that this was “not a luxury available to most”.
Sykes added that another great element of an offset mortgage was that borrowers were making gains by saving themselves interest so nothing was taxable. This compares to the markets where you are making five to 10 per cent but may have to pay income tax on dividends or capital gains tax.
Offset mortgages ‘fantastic’ for savers
Lewis Shaw, owner and mortgage broker at Riverside Mortgages, said that offset mortgages were “fantastic” for those who save and have large deposits not generating interest.
He also noted that they were good for business owners with “cash at the bank doing nothing”.
Shaw outlined an example of a business owner with a £200,000 mortgage and £100,000 in savings. They could take out a director’s loan of £100,000 in the offset account, and therefore only pay interest on £100,000 rather than the total mortgage balance.
“When it comes to accounting time again, you pay back the director’s loan, square it off, pay interest for a couple of days, and then rinse and repeat. This can significantly reduce the interest you pay over the term of your mortgage but also means you pay it off quicker,” he added.
Sykes agreed that offsets were a “fantastic tool for those with cash or who may need cash at a later date”.
He pointed to a recent client that needed £500,000 to buy a property and wanted to borrow an additional £250,000 for works on the property over the next two years. They needed instant access to funds but the five per cent interest would mean it would cost them £12,500 a year if it was not offset.
Another example was a client buying a £2m property but they did not want all money tied up, so Sykes secured a mortgage of £1m on an interest-only bases. This was put in an offset account, so their monthly payments were zero and they would have instant access to £1m.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said: “Offset mortgages are an excellent, if very underrated, financial planning tool. Using your savings to help reduce the interest paid on your mortgage, whilst having full access to the savings if you need them, is a very powerful way to use your money.”
Stinton said that there was an assumption that offset mortgages “only work for big earners and big savers” but that was not always the case.
“While it’s true that offset is usually attractive to these types of clients, the products are not exclusively designed for them. Clients at the other end of the scale, with lower mortgage balances and less held in savings, could still see their money working harder for them with an offset product,” he said.
Stinton added: “It’s always worth running through an offset calculator to quickly find out if these products could be suitable. This will highlight how much money could be saved over the term of the mortgage, or how much quicker the mortgage could be paid off.”
