Offset Mortgage Guide UK 2025

A comprehensive guide to offset mortgages in the UK. Understand how they work, when they make sense, and how much you could save.

What Is an Offset Mortgage?

An offset mortgage links your savings account (and sometimes current account) to your mortgage. Instead of earning interest on your savings, the money in your linked accounts is "offset" against your mortgage balance, reducing the amount you pay interest on.

How It Works: Simple Example

GBP 250,000
Mortgage Balance
GBP 30,000
Savings Linked
GBP 220,000
Interest Charged On

You only pay interest on GBP 220,000 instead of the full GBP 250,000. Your savings remain accessible, but instead of earning taxable interest, they save you mortgage interest (which is often at a higher rate).

Offset Mortgage vs Standard Mortgage

Feature Offset Mortgage Standard Mortgage
Interest calculated onBalance minus savingsFull balance
Savings earn interest?No (but they save mortgage interest)Yes (taxable)
Access to savings?Yes - withdraw anytimeN/A
Typical interest rateSlightly higher (0.1-0.5% more)Lower headline rate
Tax benefitSavings "interest" is tax-freeSavings interest is taxable (above PSA)
Best forHigher/additional rate taxpayers with significant savingsThose with minimal savings
OverpaymentsUsually unlimitedOften limited to 10% pa

Who Benefits Most from Offset Mortgages?

Great For

  • Higher rate taxpayers: The tax-free benefit is most valuable when you pay 40% or 45% tax on savings interest
  • Self-employed: Keep tax reserves linked while saving on mortgage interest
  • Significant savings: The more you offset, the greater the benefit
  • Those wanting flexibility: Your savings remain accessible unlike overpayments

Less Suitable For

  • Minimal savings: If you have little to offset, the higher rate costs more
  • Basic rate taxpayers: With the Personal Savings Allowance (GBP 1,000), the tax benefit is minimal
  • Rate chasers: If getting the absolute lowest rate is your priority
  • First-time buyers: Usually have limited savings to offset

Savings Calculation Example

Here is a worked example showing potential savings with an offset mortgage over 25 years:

Standard Mortgage Offset (GBP 30K saved) Offset (GBP 50K saved)
Mortgage amountGBP 250,000GBP 250,000GBP 250,000
Interest rate4.5%4.7%4.7%
Effective balance chargedGBP 250,000GBP 220,000GBP 200,000
Monthly paymentGBP 1,390GBP 1,390GBP 1,390
Total interest paidGBP 166,926GBP 144,400*GBP 127,800*
Interest saved-GBP 22,500+GBP 39,100+
Years saved25 years~22 years~20 years

*Approximate figures for illustration. Actual savings depend on your specific mortgage terms, rate, and savings balance over time. Use our calculator for personalised projections.

Offset Mortgages and Velocity Banking

An offset mortgage is the closest UK equivalent to the HELOC strategy used in American velocity banking. Here is how they relate:

  • Cash flow optimisation: Both strategies use your income and savings to reduce the balance that interest is calculated on
  • Liquidity: Both allow you to keep access to your money (unlike making direct overpayments)
  • Acceleration: Both can significantly reduce your mortgage term and total interest paid

Learn more about how velocity banking principles translate to the UK.

How to Get an Offset Mortgage

  1. Check your eligibility. Offset mortgages have similar criteria to standard mortgages but may require a higher deposit (typically 20-25%).
  2. Compare deals. Look at the overall cost including the slightly higher rate, not just the headline rate. Factor in your tax rate and savings balance.
  3. Speak to a mortgage broker. An independent broker can search the whole market and help you compare offset vs standard options for your situation.
  4. Consider the features. Some offset mortgages allow family linking (multiple accounts offset), current account linking, and unlimited overpayments.

Frequently Asked Questions

Yes. Your savings remain in your account and you can withdraw them at any time. However, withdrawing savings increases the mortgage balance that interest is charged on. This is one of the key advantages of an offset mortgage over making direct overpayments.

No. Your savings do not earn interest. Instead, they reduce the mortgage balance on which interest is charged. The effective "return" on your savings equals the mortgage interest rate, and this return is tax-free. For a 40% taxpayer with a 4.5% mortgage rate, this is equivalent to earning 7.5% gross on savings.

Typically yes, by around 0.1% to 0.5%. However, for borrowers with significant savings (especially higher-rate taxpayers), the interest savings from offsetting usually outweigh the slightly higher rate. Always do the full calculation for your specific situation.

Some lenders offer "family offset" mortgages where parents or other family members can link their savings to your mortgage. Barclays, Yorkshire Building Society, and some other lenders offer this feature. The family member's savings reduce your interest while remaining in their own name.

Related Guides

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