Simply put, an Offset mortgage is a product that allows a borrower to ‘link’ their savings to their mortgage account. Clients only pay interest on the difference between the Offset savings balance and the mortgage amount, so their savings reduce the mortgage interest they pay.

With Coventry Building Society, our Offset mortgage is straightforward and can be taken out on a residential property, subject to meeting lending criteria. For example, somebody who has an outstanding mortgage amount of £200,000 and has £50,000 in a linked savings account would only pay interest on the £150,000 difference. However, this borrower would not earn any interest on the savings their mortgage is linked to.

With a necessary savings element, Offset mortgages are clearly not suitable for everybody. But although the current cost-of-living crisis is an acute and growing problem for a significant number of people in the UK, there are still a number of households with sufficient savings that could take advantage of an Offset mortgage. With many borrowers set to experience an increase in their mortgage repayments, Offset mortgages could be a good way to mitigate some of the impact.

Indeed, recent Bank of England data shows that the total amount of savings in the UK increased from £918 billion in 2019 to £1.045 trillion by the first quarter of 2023. Crucially, our own research suggests that almost 

£271 billion of these savings are currently being stored in accounts that pay zero interest. With inflation running at 6.8% as of August this year, the value of this money is quickly being eroded.

Many lenders offer a repayment or interest-only option for Offset mortgages. These work in the same way as traditional mortgages – a repayment product means borrowers pay both capital and interest payments each month. An interest-only mortgage sees them pay just the interest on the outstanding balance, with the original amount borrowed to be repaid at the end of the mortgage term.

Clients who choose an Offset mortgage can enjoy many benefits, including:

• Putting money to work: With inflation currently outrunning even the best of savings account rates – let alone those set at zero or near zero – the value of many people’s wealth is being eroded on a daily basis. Although any money put into a savings account linked to an Offset mortgage won’t earn interest, the money saved through paying interest only on the difference rather than the full mortgage amount – called the offset benefit – can provide more value in the long term than the interest earned from savings would.
• Easy access to money: Overpaying a mortgage is a popular way of reducing a mortgage term and/or monthly payment amounts. However, once that money is paid to the lender, the borrower can no longer access it. With some Offset mortgages, money saved could be withdrawn at any time and with no penalty – although, of course, the offset benefit will shrink.
• Benefit from greater tax efficiencies: Interest saved through funds stored in Offset savings doesn’t count towards the personal savings allowance.
• Reduce the mortgage term or help to lessen the impact of rising rates on monthly mortgage repayments: With a repayment Offset mortgage, borrowers can choose to decrease either their mortgage term or the amount they pay each month. With an interest-only mortgage, monthly payments or the outstanding balance can be reduced.

Opting for a repayment Offset mortgage also means the offset benefit reduces the outstanding balance, which lowers the amount of mortgage interest paid, therefore shortening the mortgage term. On the other hand, if a borrower wants to keep the same term length over the lifetime of the mortgage, they can reduce their payment amount by opting to automatically put their offset benefit towards their subsequent monthly payment, helping with monthly outgoings.

With an interest-only Offset mortgage, monthly mortgage payments can be lowered through the same method as with a repayment mortgage, or the offset benefit is credited to the outstanding mortgage balance owed, meaning a lower pay off amount at the end of the mortgage term.

As savings interest rates go up, the amount people can save before being taxed goes down. For example, data from CACI’s Mortgage Market Database, shows that as of June 2023, with the average one-year fixed rate at 4.21%, a basic rate taxpayer can save £23,753 before paying tax. In December 2022, when the average one-year fixed rate stood at 3.51%, a basic rate taxpayer could store away £28,490 without incurring a tax bill.

And while ISAs also offer tax-free savings, they are limited to deposits of £20,000 per tax year.

A common misgiving many people have is that Offset mortgages are complicated products designed for complicated financial circumstances, but this couldn’t be further from the truth.

Making things even more simple is the fact that with some lenders, including Coventry, an Offset mortgage is linked to a single Offset savings account, which works much like a regular savings account does – deposits and withdrawals are made as normal.

Some people also believe that an Offset mortgage requires a minimum savings deposit, but many lenders now have no such barrier to entry nor any limits on how many times savings can be withdrawn. Today, with a lot of Offset products, any amount of money can be credited to a current or savings account and used with any level of activity.

Another common myth is that these products are not flexible. Some lenders allow penalty free withdrawals at any time, and money can be deposited into a savings or current account at any point. Small monthly amounts saved in this way can make huge long term changes to the cost of the mortgage.

A quick calculation shows that on a 25-year term £100,000 Offset mortgage fixed at 5.85% until 2029, borrowers who initially put no deposit into a current or savings account but save £100 a month could reduce the time until they pay off their mortgage by three years and nine months compared to a standard five-year fix at 5% (as of August 2023).

For brokers, Offset mortgages provide an excellent opportunity to help clients with a different, but simple way to manage their finances, and there will be many individuals who could benefit from one of these solutions.

• People with high cash savings – and who are happy to keep it in an account to make the most of the Offset benefit.
• Higher and additional rate taxpayers – because interest saved through money stored in Offset savings is not taxed.
• Somebody who has received an inheritance – especially if they’re not sure what to do with it or are unfamiliar with handling significant lump sums of money.
• The self-employed – for two reasons. First, many self-employed people receive irregular income, so offsetting to minimise monthly repayment bills can be useful. The second reason is that some self-employed people keep a large sum of cash handy for tax bills during the tax year – this can be put to work instead of it sitting in a cash account attracting low rates.
• Buy to Let landlords – to help with the mortgage repayments for their own residential mortgage and to potentially ease the impact of the recent tax changes, whereby landlords can no longer deduct interest payments when declaring their annual rental income.

So, how do brokers raise Offset mortgages in discussions with their clients? As with any other financial product, a recommendation should only be made after thorough client discovery – this is especially important now that the Consumer Duty is in full effect.

One question brokers can start with concerns the mortgage goals of the borrower. Is the client keen to pay their mortgage off early and has the financial resources to do so? It may then be worth discussing how an Offset mortgage could help them achieve that goal.

By contrast, does the client want to access their savings frequently? In this situation, a typical repayment mortgage might be a better choice. Although withdrawals are often fine, the consistent removal of funds from an Offset savings account will negate the advantages offsetting provides.

Finally, for those borrowers with a high income and high outgoings (or with a strong likelihood of outgoings rising in future), an Offset mortgage may not be the best option as the interest rates on a regular savings account might provide more value than a small Offset benefit. As with any client, brokers will need to consider whether the product is worthwhile depending on the individual’s circumstances.

An Offset mortgage, in allowing savings or current accounts to be linked to an outstanding mortgage balance, is a flexible way of reducing the amount paid on mortgage interest, reducing the length of a mortgage term, or lowering monthly repayments.

Such a product suits people with different levels of savings, including borrowers who often operate with cash savings for specific periods of time, such as the self-employed, and higher- and additional-rate taxpayers, because any interest saved does not attract tax. However, depending on individual financial habits, the net can be cast much wider than this.

For example, although the amount people are saving has fallen and costs have risen, households are still putting away an average of 8.8% of their disposable income each month, according to Trading Economics. The opportunity for borrowers to leverage this shouldn’t be ignored and we encourage every broker to look to their back books and identify who in their client base could save potentially thousands of pounds through a simple change of mortgage.

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