Offset mortgages

An offset account could save you thousands and shave years off your mortgage.

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By

Matthew Boyle

Updated

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Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Offset mortgages are often used as a way to save money. They are used to help reduce your monthly payments or shorten the term to enable you to be mortgage-free sooner.

How do offset accounts work?

An offset account is a transaction account attached to a mortgage. The balance of a 100% offset account is taken away from the principal remaining on the mortgage for interest calculation.

This diagram explains how Offset accounts work

In this hypothetical situation, interest is applied to £230,000 instead of the full £250,000 owed. As savings grow, the amount saved on interest also grows. Effectively, this reduces the amount of interest charged over the life of the mortgage.

Why should I consider an offset account?

An offset account may save you interest and cut the length of a mortgage. It will work best for people who can maintain a decent balance in their offset account and contribute further to it over time. It is worth shopping around, as offset accounts can differ in inclusions and fees.

Will a mortgage with an offset account cost me more than a standard mortgage?

Traditionally, mortgages with offset accounts would either attract a higher interest rate or higher fees and sometimes both. However, with the emergence of smaller online lenders, many mortgages are feature-packed with market leading rates. Major lenders still tend to charge a premium for offset accounts, so it is worth shopping around.

Are there different types of offset accounts?

Yes, there are 100% offset accounts and partial offset accounts:

  • 100% offset accounts are the most common form. As explained in the above table, the balance of the offset account is deducted from the outstanding principal before interest is calculated. The balance of this offset account doesn’t earn interest.
  • Partial offset accounts can be explained as an online savings account where the interest which would be generated by the balance pays off the principal of the mortgage, without the borrower having to pay tax on the interest. A 100% offset account can be a far more effective tool for reducing the interest paid on a mortgage.

How much interest can I save by using an offset account?

Below is a hypothetical mortgage scenario comparing the same mortgage with and without a 100% offset account.

comparing-offset-without-offset2

From this example, taking the mortgage with an offset account saves a whopping £136,000 over the life of the mortgage. It also reduces the term of the mortgage from 25 years to 19 years and 8 months. Owning a home outright, debt free, is a goal that is well worth fast-tracking. Especially as first-time buyers are waiting longer to plunge into the property market.

What fees do I need to be aware of?

Some offset accounts charge fees on standard transactions. It is well worth putting the research in as to whether the mortgage you’re applying for has a transaction account that will end up costing you money.

Offset tips

  • Savings. Build up your offset savings account by making regular deposits using your income, rental earnings or any other money you accumulate.
  • Long-term benefits of offset accounts. If you move into a new house but hold on to your previous property then you can turn your mortgage into an investment loan if you rent your property out to new tenants.

Frequently asked questions

Finder survey: How many of us plan to purchase a property in the next 10 years?

ResponseYorkshire and the HumberWest MidlandsWalesSouth WestSouth EastScotlandNorthern IrelandNorth WestNorth EastGreater LondonEast of EnglandEast Midlands
No45.88%39.13%46.97%52.17%45.03%47.37%66.67%51.24%57.14%27.78%55.17%52.27%
Yes29.41%33.04%22.73%20.29%33.11%34.21%25%21.49%14.29%48.15%21.84%28.41%
Not sure24.71%27.83%30.3%27.54%21.85%18.42%8.33%27.27%28.57%24.07%22.99%19.32%
Source: Finder survey by Censuswide of 1032 Brits, December 2023
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
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Matthew Boyle is a banking and mortgages publisher at Finder. He has a 7-year history of publishing helpful guides to assist consumers in making better decisions. In his spare time, you will find him walking in the Norfolk countryside admiring the local wildlife. See full bio

Matthew's expertise
Matthew has written 244 Finder guides across topics including:
  • Helping first-time buyers apply for a mortgage
  • Comparing bank accounts and highlighting useful features
  • Publishing easy-to-understand guides
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