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How Do Offset Mortgages Work: Explained

How Do Offset Mortgages Work: Explained
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin13 May 2024

Paying less on your mortgage sounds good, right? An offset mortgage could be a key to this. This blog will guide you through how offset mortgages work, showing ways they might save you money on interest.

Keep reading for savvy insights.

What is an Offset Mortgage?

An offset mortgage links your savings account balance directly to your mortgage debt. This setup reduces the amount of interest you pay on your mortgage over time.

Definition and explanation

An offset mortgage combines a savings account with a home loan, where the money in the savings acts directly against the mortgage balance. This setup means homeowners pay interest on their loan minus what's in their savings.

For example, if you have a $200,000 mortgage and $30,000 in your linked savings account, you only pay interest on $170,000 of the mortgage.

This type of mortgage calculates interest daily based on the reduced balance due to the offsetting effect of your savings. It creates an opportunity for borrowers to save thousands in interest costs over time without having tax implications on their saved money.

Moving forward, understanding how it works will shine more light on its benefits and flexibility for homeowners.

How Offset Mortgage Work

Moving from the basic definition of an offset mortgage, we dig into its operational mechanism. With this type of mortgage, your savings act as a counterbalance to your mortgage debt.

For instance, if you have a $200,000 mortgage and $20,000 in savings, you only pay interest on the difference which is $180,000. This approach allows you to either lower your monthly payments or shorten the term of your loan without touching the principal amount.

Using tools like an offset mortgage calculator can reveal how adjusting your savings balance affects your interest payments over time. Since you're charged mortgage interest payments on a reduced amount – only on the outstanding balance minus your savings – over time, this can significantly decrease the total amount of savings interest you pay throughout the life of your loan.

This strategy not only makes for smarter financial management but also offers potential savings when comparing family offset mortgage rates through a comprehensive offset mortgage comparison process.

Types of offset mortgages

Offset mortgages blend your mortgage and savings, letting you reduce the interest you pay on your loan. They come in various forms to cater to different financial situations. Here's a closer look at the types of offset mortgages available:

  1. Standard Offset Mortgages: These accounts allow you to link your savings directly with your mortgage. The more savings you have, the less interest you'll need to pay on your mortgage, speeding up the repayment process.
  2. Family Offset Mortgages: This type enables family members to support one another in reducing mortgage interest rates. Family members can link their savings to help reduce the interest charged on the borrower's mortgage, making it an attractive option for helping first-time buyers get onto the property ladder.
  3. Buy-to-Let Offset Mortgages: Specifically designed for landlords, these mortgages take into account the balance in a linked savings account when calculating interest on a buy-to-let property mortgage. This option is great for those looking to save money on properties they rent out.
  4. Fixed-Rate Offset Mortgages: As offered by YBS (Yorkshire Building Society), these mortgages lock in an interest rate for a set period of time while still allowing borrowers to offset their savings against their mortgage balance. This provides stability in monthly repayments while retaining offset benefits.

Each type offers a unique way to use your or your family’s savings effectively against your borrowing, potentially saving thousands in interest payments and shortening the term of your loan. Finding the best offset mortgage requires considering how each type aligns with your personal or investment property goals.

Benefits and Drawbacks of Offset Mortgages

Offset mortgages offer a unique way to save on interest, potentially lowering your monthly payments. Yet, they also come with challenges, like higher rates or fees than standard mortgages.


Offset mortgages offer significant benefits, including the potential to save around 10% on your mortgage interest. This saving stems from offsetting your savings account balance against your mortgage amount, reducing the overall interest you owe.

With these types of mortgages, borrowers also have a chance to deposit smaller amounts initially and enjoy the flexibility of paying off their mortgage earlier than expected.


Before deciding on an offset mortgage, consider that your savings won't earn interest once they're used to offset your mortgage. This is a key factor for savers looking to maximize returns on their hard-earned money.

High interest rates compared to traditional mortgages may also apply, impacting the overall cost of borrowing over time.

Another important consideration revolves around the flexibility of your finances. Making withdrawals from your linked savings account can increase monthly mortgage payments, affecting budgeting and financial planning.

Moreover, some accounts impose limits on how much you can save in them, potentially restricting the benefits of offsetting.

Tax implications on interest income

As we consider the financial aspects of offset mortgages, it's crucial to also understand how they impact tax on interest income. Unlike traditional savings accounts where the interest earned is subject to taxes, offset mortgages offer a unique advantage.

Since your savings in an offset account do not earn any interest, you owe zero tax on them. This structure makes an offset mortgage an attractive option for saving money without worrying about additional tax burdens.

The absence of taxed interest can lead to considerable savings over time. With no need to pay taxes on what would have been considered income through earned interest, individuals find more value in using their surplus cash to reduce mortgage costs instead of placing funds in a standard savings account where the gains would be taxable.

This feature highlights another layer of financial benefits that come with choosing an offset mortgage strategy for managing both your mortgage and your savings effectively.

Tips for Choosing the Best Offset Mortgage

Discover how to pick the perfect offset mortgage for your needs with smart strategies that save you money. Keep reading to find out how you can make an informed choice!

Factors to consider

Choosing the right offset mortgage can save you a lot of money over time. Here are several key factors you should consider before making a decision:

  1. Early Repayment Fees: Some lenders charge a fee if you pay off your mortgage early. Check the agreement for any penalties that may apply to early repayment. This could affect your flexibility if your financial situation changes and you decide to pay off your mortgage sooner than expected.
  2. Cash Accessibility: An important feature of offset mortgages is the ability to access your savings quickly without penalty. Make sure you understand how easily you can withdraw funds from your linked savings account without affecting the benefits of your offset mortgage.
  3. Interest Rates: The interest rate on an offset mortgage can be higher than that of traditional mortgages. Compare rates from different lenders to ensure you're getting a competitive deal. Lower interest rates mean lower monthly payments, but they also need to balance with other features and fees.
  4. Fees: Lenders may charge setup, annual, or service fees for an offset mortgage. These fees can add up, so it's vital to factor them into the overall cost of the mortgage before signing up.
  5. Mortgage Adviser's Advice: Consulting with a mortgage adviser can provide personalized advice based on your financial situation and goals. They can help assess whether an offset mortgage is practical for you and guide you toward the best options available.

Considering these factors carefully will help you choose an offset mortgage that fits your needs and financial plans.

How to find the best deals

Finding the best deals on offset mortgages starts with using mortgage calculators. These tools help estimate how much you could borrow, the savings from making overpayments, and how changes in the Bank of England Base Rate might affect your payments.

By inputting different scenarios, you can compare which offset mortgage options offer the best value for your financial situation.

Many lenders allow up to a 10% annual overpayment on mortgages without imposing any penalties. If considering higher overpayments, check for any fees that may apply. This flexibility can lead to significant interest savings over time and is a crucial factor in identifying favorable deals.

Always review the terms regarding overpayments as part of your deal comparison process to ensure you choose an option that aligns with your financial goals and payment capabilities.


Offset mortgages offer a creative way to use your savings effectively, potentially saving you money on interest payments. By choosing this type of mortgage, you take a step towards smarter financial management of your home loan and savings.

It's essential to weigh the benefits against the drawbacks and consider how an offset mortgage aligns with your financial goals. Engage with various lenders to explore the best deal that suits your needs.

This approach ensures you make informed decisions for your financial future while taking advantage of potential savings opportunities an offset mortgage provides.


1. What is an offset mortgage?

An offset mortgage links your savings account to your mortgage, reducing the amount of interest you pay.

2. How does an offset mortgage save me money?

It saves money by only charging interest on the difference between your mortgage and savings amounts.

3. Can I still access my savings with an offset mortgage?

Yes, you can access your savings anytime without affecting your mortgage.

4. Do all banks offer offset mortgages?

No, not all banks offer them; it's important to check with individual banks for availability.

5. Is an offset mortgage right for everyone?

Not necessarily; it depends on your financial situation and goals, so consider speaking with a financial advisor.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.