Five Questions About: Offset mortgages

What is an offset mortgage?

An offset mortgage enables you to link your savings, and often your current account, to your mortgage. Rather than earning interest on your savings, you don't pay it on the equivalent amount of your mortgage debt. You can still access the money in your savings and current accounts at any time.

How does it work?

If, for example, you have a £100,000 mortgage and £30,000 in a linked savings account, you only pay interest on £70,000 rather than the full £100,000 loan. Someone with £30,000 in savings and a £100,000 repayment mortgage over 25 years, paying an interest rate of 3.49 per cent, could shave five years off their mortgage term and save £11,648.51 in interest.

Is an offset mortgage right for me?

People for whom offset mortgages are useful include higher-rate taxpayers – who lose up to 50 per cent of the interest earned in savings accounts – and the self-employed, who can use cash set aside to cover tax bills to reduce their mortgage interest.

Which lenders offer offset mortgages?

The main offset mortgage providers are First Direct, Woolwich, Yorkshire Building Society and Scottish Widows. The One Account offers a current account mortgage that works in the same way as an offset, apart from that your mortgage, savings and current account are lumped into a single account.

Where can I find the best offset mortgages?

First Direct has a two-year offset tracker at 2.29 per cent with an arrangement fee of £1,499. But you must have a deposit of 35 per cent. Yorkshire Building Society has leading two-year fixed-rate options: 3.09 per cent with a £995 fee, or 3.49 per cent with a £95 fee. Both deals require a 25 per cent deposit.