What is an offset mortgage?
An offset mortgage lets you link your mortgage to your savings account. You only pay interest on the difference between your mortgage and your savings. This could help you lower your mortgage costs.
We don’t offer offset mortgages at Lloyds, but our guide can help you learn more about how they work.
The headlines
- Offsetting your mortgage could help you lower your monthly payments or pay off your mortgage quicker.
- Changes to your savings account could affect your offset mortgage balance.
- Your mortgage and savings account must be with the same provider.
With an offset mortgage, you can put savings into an offset account. You won’t earn interest on these savings. Instead, your lender will use this money to ‘offset’ your mortgage balance and only charge you interest on the remaining amount.
Let’s look at an example:
- your offset mortgage balance is £250,000
- you have £25,000 in savings
- you’d only pay interest on £225,000, not the full £250,000.
The more you have in savings, the less interest you could pay on your mortgage.
Types of offset mortgage rates
Offset mortgages can work in slightly different ways depending on the type of mortgage rate you have:
- Offset fixed rate mortgage. Your interest rate stays the same for the length of your deal.
- Offset tracker mortgage. Your interest rate could change in line with the Bank of England Base Rate.
Offset mortgage rates might be higher
The rates for offset mortgages may be higher than those for other mortgages. Plus, if you need to use your savings, your monthly payments might go up.Â
You won’t earn interest on your savings
Your savings could help lower the interest you pay on your mortgage. But you won’t see the benefits of any potential savings interest rate changes.
It won’t improve your loan-to-value (LTV) ratio
Using your savings for an offset mortgage doesn’t change your loan-to-value (LTV) ratio. But if you put your savings directly into your property, you could build your equity and lower your LTV.
You might have less flexibility
Offset mortgages are usually only arranged when the mortgage and savings account are with the same lender. This could mean you have less choice over who you save with. They are also not as common as other mortgages and are only offered by a handful of lenders.
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Each option has its own benefits:
- a bigger mortgage deposit might help lower your loan-to-value ratio, which could get you a better mortgage deal
- an offset mortgage lets you keep access to your savings while lowering the amount you pay interest on.
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Offsetting and overpaying your mortgage are two ways you could save on your mortgage costs, but they work in different ways.
- Offsetting uses your savings to reduce the balance your mortgage interest is charged on.
- Overpaying directly pays off your mortgage, permanently reducing what you owe.
Offsetting gives you flexibility - you can usually take out savings if needed, but rates can be higher. Also, if you take any savings out, you'll pay more interest because your mortgage balance will be higher. Overpaying usually lowers your mortgage faster and saves interest, but it maybe be harder to access money once it’s paid in.
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You can usually access your savings with an offset mortgage – but it’s best to double-check with your mortgage provider. If you take money out of your savings account, you'll reduce the amount that offsets your mortgage balance. This means your interest would increase and your monthly repayments could rise.
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No, Lloyds does not now offer an offset mortgage. But there might be a different mortgage type that suits your needs.
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No, you don’t pay tax on an offset mortgage. Your savings are used to lower the mortgage interest, rather than earning interest themselves. With no interest on your savings, there's no tax due.
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Yes, some lenders might offer an interest-only offset mortgage. This works differently to a standard offset mortgage, as your monthly mortgage payments only cover the interest rather than your full mortgage balance.
You’ll then have to pay the full balance at the end of your mortgage term.
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