How does an offset mortgage work?

An offset mortgage combines a mortgage account, savings and current account with one provider. Each account has a different interest rate which is calculated daily and the idea is to offset the mortgage loan with the positive balances in the savings and current accounts reducing the interest cost.

If you have large amounts of savings and not earning much interest an offset mortgage would allow you to reduce your loan and potentially save thousands of pounds over the lifetime of the mortgage.

Some lenders may also allow you to include personal loans and credit cards to be included applying the lower interest rate of the mortgage rather than the higher levels of more expensive debt. Although this would reduce the interest cost, it can convert short term debt to long term debt unless your repayments are maintain at their normal levels.

An offset mortgage may not be suitable to everyone as some lenders would allow you to draw down in excess of your repayments so your mortgage balance could exceed the original loan. Therefore you would need a degree of discipline to manage your money to ensure you do not get into financial difficulty.

Some people would prefer to keep their savings separate from their mortgage debt so they know they have a fund to access in the event of an emergency or for holidays or a large purchase.

If you do have spare savings, you may prefer to reduce your mortgage with a lump sum payment as most lenders allow you to overpay 10% of the loan each year without penalty. This way you can access more deals in the market and select a low cost tracker discount or fixed rate.

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