Growing up, I was often told that paying off your mortgage was the best financial decision you could make.
A funny lecture to give an eight-year-old, granted. But the thought got stuck in my head.
Paying down debt makes for sexy headlines. Santander observed earlier this year that joining in with Dry January – and reallocating all of your booze money to overpaying your mortgage instead – could wipe £28,373 off your mortgage payments over 25 years.
I’m thinking about taking up drinking for Christmas just so that I can join in by quitting again next year!
If you read Monevator though, you’ll know that often the smarter decision is to invest instead.
But what if you’re already investing as much as you want to, and you still find yourself having a few thousand pounds sitting around?
Sure, you can make overpayments on your mortgage. But often after overpaying the first 10% of your mortgage value you’ll incur penalties.
And what if you suddenly want that money back? Well, then your bank will typically have its fists tightly closed around your cash.
Offset mortgages: the best of both worlds
Offset mortgages are a neat solution. Monevator has covered them in detail before.
To summarise, with an offset mortgage you put your cash into a designated account with your mortgage lender. It then subtracts that cash balance from your total debt balance each month before calculating your interest.
If you’ve got a £250,000 mortgage, say, and £40,000 in cash savings, then you only pay interest on the remaining debt of £210,000.
On paper it’s a fantastic idea. There’s no tax to pay on savings interest, you can make effectively unlimited overpayments, and you can withdraw your cash whenever you need it.
Here’s the catch
With my mortgage coming up for renewal soon – and having heard from so many offset mortgage fans over the years – I investigated to see if our next mortgage should be an offset.
That’s easier said than done, because these days, the offset mortgage sits in a murky and dusty corner of financial services – a relic of years past.
Perhaps because rates were so low for so many years people forgot about them?
Whatever the cause, I was disappointed to find many lenders don’t offer offsets nowadays, or else restrict them to existing borrowers. So as a prospective offsetter, you might struggle to find a suitable lender.
Barclays (as of 16 December) offers a mere two offset mortgage options on residential purchases, compared to 28 products without offset functionality.
Yorkshire Building Society (YBS) (as of 17 December) similarly offers two – from a total mortgage range of 11.
So even for the few lenders that offer them, offsets are a niche product.
Mortgage maths
Regardless, let’s compare some of the options available (as of December) for customers with a 75% loan to value (LTV) 1:
| Lender | Product | Initial Rate | Fee |
| Barclays | Offset 2 Year Tracker | 5.22% | £1,749 |
| Barclays | Standard 2 Year Tracker | 4.21% | £999 |
| YBS | Offset 2 Year Fixed | 4.09% | £995 |
| YBS | Standard 2 Year Fixed | 3.69% | £995 |
With Barclays you’re paying a 1.01% higher rate for the luxury of having an offset. And you can slap a £1,749 fee on top of that – a full £750 higher than with the standard tracker.
Why it should cost more? Who knows? Perhaps the bank has to share the data between the savings and mortgage teams via specially-trained carrier pigeon.
With Yorkshire Building Society, things are a bit better. It only wants 0.4% extra on the mortgage rate.
Higher rates and fees can destroy the benefits of offset mortgages
Now we’ll put some real numbers on these scenarios.
Let’s say Peter wants to borrow £400,000 over 30 years.
It’s worth bearing in mind that just because Peter likes the look of the YBS products, that doesn’t mean it will agree to lend against his property.
Hence we’ll imagine one scenario where he can only get a mortgage with YBS, and one where he can only go with Barclays:
| Product | Initial Monthly Payment | Capital paid off after 2 years | Interest costs over 2 years + fee | Total cost over 2 years | |
| Barclays – Offset 2 Year Tracker | £2,202 | £12,236 | £41,209 + £1,749 | £42,958 | |
| Barclays – 2 Year Tracker | £1,958 | £14,439 | £32,563 + £999 | £33,562 | |
| Barclays – additional cost for offset product | +£9,396 | ||||
| YBS – Offset 2 Year Fixed | £1,931 | £14,719 | £31,612 + £995 | £32,607 | |
| YBS – 2 Year Fixed | £1,833 | £15,547 | £28,451 + £995 | £29,446 | |
| YBS – additional cost for offset product | +£3,161 | ||||
With Barclays, Peter would cost himself a whacking additional £9,396 for the luxury of having an offset mortgage.
With YBS, he incurs an extra cost of £3,161.
Show me the money
Okay, that’s the bad news out of the way. Time to unleash Peter’s savings to start raking in those offsetting benefits, right?
We’ll assume Peter is a 40% taxpayer (offsets would look a smidge better if he was a 45% taxpayer and a lot worse if he was only paying 20%), that he’s already used his £500 tax-free savings allowance, and that he has no ISA space remaining.
The offsetting benefits with an offset mortgage obviously depend on how much Peter actually has in savings.
So let’s look at four possible scenarios. (All the numbers are annual):
| Lender | Savings Amount | 4.5% Savings Account (after 40% tax) | Offset (interest saved) | Surplus vs Savings | Surplus after additional interest and fees |
| Barclays | £25,000 | £675 | £1,305 | £630 | -£8,766 |
| £50,000 | £1,350 | £2,610 | £1,260 | -£8,136 | |
| £100,000 | £2,700 | £5,220 | £2,520 | -£6,876 | |
| £200,000 | £5,400 | £10,440 | £5,040 | -£4,356 | |
| YBS | £25,000 | £675 | £1,100 | £425 | -£2,736 |
| £50,000 | £1,350 | £2,200 | £850 | -£2,311 | |
| £100,000 | £2,700 | £4,400 | £1,700 | -£1,461 | |
| £200,000 | £5,400 | £8,800 | £3,400 | +£239 |
Ouch!
Okay, considering the savings income alone – achieved because the interest reduction from using an offset is not liable for income tax – Peter is indeed significantly better off with an offset, compared to keeping the cash in a taxable savings account.
But the higher rates and fees that also come with the offsets quickly undo the gains.
With the Barclays mortgage costing an extra £9,396 in interest and fees, even if Peter had £200,000 to offset, he would still be better off on a standard tracker with his cash in a savings account.
I don’t doubt many people out there have plenty of cash. But it must be a vanishingly small proportion who want to have cash savings on hand equivalent to half their mortgage value.
With YBS, only when allocating £200,000 in cash against the offset does it start to make sense. But Peter still only benefits by £239 after all the extra costs of the offset option.
For my part, I wouldn’t tie up £200,000 in an offset mortgage for such mean gruel.
Also bear in mind that in any of these scenarios, Peter could presumably just have borrowed less in the first place and put the spare cash into his deposit.
What is your goal with an offset?
It’s easy to fall into a trap of making decisions because they feel good, rather than because they make financial sense.
When people talk about how offset mortgages have enabled them to get out of debt faster by saving thousands in interest payments… well, it all sounds very enticing.
Perhaps that was your experience. But given today’s rates, an offsetter is probably worse off than if they were on the vanilla option of stashing their cash in a savings account, or simply maxing out overpayments on a standard mortgage.
True, there are a few scenarios where offsets might still make sense.
Perhaps you want to hold large amounts of cash whilst you wait for the right buy-to-let opportunity to come up? Or maybe you get large bonuses every so often but you need to keep large amounts of cash on hand for school fees? Or for getting the yacht serviced?
The frustration for me is that offsets could be a really valuable product, especially with tax on savings the latest target of the Chancellor.
The government plans for tax on savings income to rise to 2% above the respective income tax bands for 2027 to 2028. Who knows if further increases will follow.
So offset mortgages seem appealing for higher-tax rate taxpayers with cash to spare.
There’s also a lot to be said for having the flexibility to just drop extra cash into the offset when you have it, and pulling it back out when you need it.
But as of today, their uncompetitive interest rates and fees make them unattractive for most.
Your mortgage mileage may vary
As is probably obvious by now, I love the concept of offset mortgages.
But unfortunately the numbers don’t work for me.
Even if I had 50% of my mortgage balance available in cash, I still wouldn’t take out a product that only makes financial sense if I retain that cash balance for the whole duration of a two-year mortgage term.
If you need really do need to have lots of cash on hand – just in case, for some reason – then an offset may be worth considering.
Perhaps better rates will be available by the time you come to remortgage, too.
But as of right now, for most people I just don’t see a case for paying more to offset.
On the same note, if you already have an offset mortgage, then run the numbers to see if you’re actually benefiting as much as you think you are. You may well find that with a standard – cheaper – mortgage product and your cash held in a competitive high-interest savings account, you’d be better off overall.
Even if it does mean sacrificing your beloved offset!
- LTV / Loan to Value is the value of the mortgage (i.e. the loan) divided by the value of the property[↩]
Appreciate the premise of the article is about offsets ‘when you’ve already invested all you want to’, in which case the comparison with cash savings rates is fair. But really, that’s not what people round here are using them for right? They are being used to leverage up your portfolio, i.e. rather than being in the ‘invested all I want to’ camp, you are in the ‘ I want to invest more, more, more’ camp. In which case you run the numbers for expected investment returns, not cash.
Having interest rates on offsets at around 4 % is a nightmare because it represents a bit of a dilemma. When rates were down at 1% it was a no brainer to take the risk and gear up, if they were at 8%, then similar but vice versa, risk is prohibitive. But 4% argggh, what to do?
I think I would be tempted to remortgage (if possible) if rates drop closer to 3%, above that I think I’ll just pay the damn thing off and enjoy the monthly cash flow boost.
I have a 5 year offset with YBS at 4.74% with savings equivalent to half the mortgage.
A 5 year guaranteed tax-free interest rate with immediate access at that level is definitely worth it for me – I’d need to make 8%+ on a standard savings account to match it.
The cash in this account is part of my overall portfolio so I don’t hold much cash elsewhere.
Yes, the rate is higher than a standard equivalent mortgage but the flexibility is amazing. Having two or three years spending available but still earning good interest brings a lot of peace of mind, particularly for the self-employed where income may not be consistent.
It can also be easily moved into an ISA or SIPP for investment if conditions are favourable.
Shame there aren’t more products on the market at the moment, but it works well for me.
The higher cost for offset mortgages comes from the fact that the bank needs to hold RWA against the gross mortgage balance not the net balance (e.g. you are only paying mortgage interest on £[100]k but the bank holds equity against it as if it was a £[200]k mortgage).
This is offset by the value of the deposit held which is determined by the bank’s treasury team based on overall funding costs. As this deposit is accessible at any time (you can drawdown on the mortgage at any time) its value is not particularly high.
Then add all the operational complexity for a niche product.
@Rhino I would have expected, if someone’s goal was levering up, that offsets would not be useful since they necessitate holding cash to make them worthwhile – and as you can see in the analysis it can be huge amounts of cash required. If your focus is investing, then going interest-only and investing the surplus, or having a repayment mortgage but borrowing more when you can and keeping at 60 or 75 LTV would enable you to have far more in the stock market than if you attempted to use an offset. If I’ve missed something on that front please do let me know, though!
@Quorum from my analysis, that puts you right at the point where it can make sense financially – with YBS having savings of half the mortgage. I suppose if you were to move some of it over to an ISA or a SIPP it could well tip the balance away from offsets. I was certainly surprised at how much cash you realistically needed to hold for the maths to add up – it makes more sense for those that have already accrued a decent cash pile than those who want to grow one.
@Platformer, thanks – that makes sense. I’ve seen plenty of anecdotal evidence that Barclays are trying to minimise RWA by reducing unused credit card limits, overdrafts etc at the expense of some rather irritated customers, so that may well explain why the differential for offset vs non-offset is so colossal for them at the moment.
@Frugalist, appreciate the number crunching, but you have to take a step back from the offset vs. standard mortgage numbers.
We usually want to hold some (almost) risk free assets so where should they be?
In a SIPP, cash is tax free but the interest rate is poor. You could hold other low risk assets of course, but access is restricted until at least 55 (57 soon) and withdrawals have consequences.
It could go in an ISA and the money is accessible but then it isn’t growing tax free and once it’s removed it can’t be replaced (except in limited circumstances with flexible ISAs).
It could be kept in a high interest savings account where it’s accessible but there may be restrictions on taking it out and you’ll be paying 40/45% tax on it.
So, the flexibility and return on cash, for me, makes offsets incredibly attractive.
Good piece @Frugalist, and a reminder of the slim pickings on offer at the non-standard end of the market. The offset approach has its benefits if you need to act now and buy a house with a big mortgage and have great expectations of a later influx of cash when you are able to sell your old house, rather than relying on maxing out your annual overpayments at 10% a year. Or to have a ready line of credit available at mortgage-style pricing. You get the impression banks don’t care for them, offering them rarely and with unfavourable rates.
I was in a position to pay off the mortgage recently and had the balance in cash, ready to go. I considered whether it was worth getting an offset mortgage and holding the full balance in the linked account for the liquidity in a big emergency/market crash.
It just didn’t seem worth the hassle, especially getting a mortgage with non-employment income.
I did manage to get credit card points, paying the balance off by card though 🙂
On the subject of mortgage products of yore, I’d like to read something about Self-Certified Mortgages (“liar loans” as they were somewhat unfairly nicknamed). New ones were supposedly regulated out of existence by the FCA, but do they still exist overseas, and what happened to the existing ones? Did you have one, and how much did you stretch the truth when getting it? What proof did they need?
One of the Offset Mortgate OG’s here, having had one with Intelligent Finance since the v bottom of the GFC. Base rate +1.09% tracker for life terms. I understand they don’t make them like that anymore.
The one offset mortgage benefit not mentioned in your article is that if used strategically with a decent built up cash reserve on the offset side, you’ll probably be in the position that you’ll never need to remortgage ever again, so whilst the fees may be higher, they may be a one off life cost rather than having other remortgage fees when renewals inevitably come up on fixed term deals.
Just freeing myself of the dread/hassle of remortgaging was a massive win for me too. Lowering the amount of ‘life admin’ is always a win in my book.
Just an extra thought anyway.
If you can find a savings account that pays as much as your interest rate (after tax) you can also create your own offset mortgage.
For example, the current average payout rate on tax-free premium bonds is 3.6%, which is in touching distance of the best available mortgage rates (and noticeably higher than my own legacy mortgage rate). As a couple you can put up to £100k into Premium Bonds. Returns are not guaranteed and follow a (skewed) probability distribution, but if you invest fairly large amounts over several years, variability in the payout rate is significantly reduced.
It is remarkable how the mortgage market has shifted away from offsets. I switched to an offset sometime in the noughties, I recall I wasn’t specially interested at the time but the bank was promoting an offset product, no switching cost and identical conditions, identical tracking margin as their standard product.
As others have noted a tracker offset is (was ?) a simple, flexible cost-effective & consumer -friendly product able to cope with ups and downs, without hassles, re-mortgaging fees etc.. Shame they seem to be no more.
Worth mentioning YBS offer a ‘family and friends’ offset mortgage, where a 3rd party can use their savings to reduce the interest paid by the mortgagee.
Bearing in mind the inter-generational issues raised by TI’s recent piece, we used this to good effect when we downsized, leaving a large cash lump sum, at the same time as our daughter bought a property. We help reduce her interest costs, whilst retaining control of the money for future needs.
I used to have an interest only mortgage with offset – adding the offset did not affect the rate at that time. I really liked the flexibility of it.
A friend had one of those current account mortgages where your mortgage is effectively a big overdraft. They’re even rarer now (if they exist at all) but I’d love to have something like that as my next mortgage. Apparently they fell out of favour because we can’t be trusted to have the discipline to pay them off. Pfffff!
They’re also good because as your debt is inflated away and salary increases you’re likely to want to pay more per month – amd no need to shop around for a new product (as mentioned above – I really hate that sort of life admin too).
Great piece, @Frugalist! I’m with @Living Cheap in London on this one. I switched to an Offset Tracker with the Woolwich in 2001. The terms were 0.75% above base for the full 25 years. We kept anything from negative amounts (we were able to borrow further at the mortgage rate), up to more than 50% of the borrowed amount in the positive direction. We kept the payments steady as interest rates fell and were paying it down early, but put the brakes on when interest rates got very low.
At various points I used the borrowing to buy out a retiring partner at work, to do house improvement projects and kept my tax reserve in the account. I honestly couldn’t have recommended it highly enough.
Then Barclays got me as they bought the Woolwich. I can add to your anecdotal evidence on Barclays with an anecdote as evidence! We started getting emails and letters along the lines of “we see you aren’t using your full offset facility. If we don’t confirm in the next 5 working days that you wish the facility to continue we will assume it is no longer needed and will cancel the unused portion”. I contacted them every time, initially in panic, then in anger and finally in perverse satisfaction.
Your figures are shocking regardless, but the biggest difference to my original mortgage is the fact that it was for the lifetime of the loan- the difference between a 2 year fix and a 25 year agreement is like night and day
Windy
Currently on year 20ish of a 25yr interest only offset mortgage; base rate + 0.59%. Offset includes current account. Effectively paid it off already before 2021 but still keep it with an amount offsetting to act as the emergency funds part of my portfolio. In this matter I consider myself both lucky and wise (not so with all my decisions!).
@Windinthefens – we’ve gone through a similar experience over last 5 years or so. First HBOS stopped allowing any changes to the IF mortgages, then they removed the current accounts, & then the last nail in the coffin came this year when they closed the entire bank. Our offset has now been moved to BOS but it’s not as elegant as we can’t see all the offset accounts and the mortgage in the same login (it is still offsetting though – no change to any of the terms). Will be done with it all next summer. Can’t rinse any more years out of the system with lower payments.
I imagine there’s a Bean Counter somewhere in the offices at BOS counting down the days for our mortgage to be off their books lol.
Our original, conventional, repayment mortgage was part way through when the Building Society offered us a swap to a “flexible” mortgage. We could overpay and then later borrow back the overpayment. We could also extend the mortgage’s life, which we did. It all proved wonderfully convenient and profitable, especially after we retired.
I suppose that means it was unprofitable for the other members of the BS.
As a business owner I love our offset mortgage, I pay myself largely in dividends once a year, which is taxed a year or so later. We get the benefit of quite a large float, without being taxable. Plus it’s piece of mind to know we could withdraw some “overpayment” if the business needed cash urgently.
In the “four possible scenarios. (All the numbers are annual)” table, the final column isn’t annual figures though, it seems to be using the total excess cost over the two year mortgage. So the figures aren’t as bad as they look, not that this would change the conclusion.
I wonder how it compares over a longer term mortage? I imagine most people who’d want an offset mortgage would want 5 year+.
For my part, I paid early repayment fee to after year 4 on my 5 year offset mortgage in early 2022, to lock in lower rates (on 10 year non-offset mortgage), when they were just starting to rise. The offset product had served a purpose for me at the time but I expect was a bit more expensive overall.
It is a shame that offset mortgages are so niche now.
I’ve an offset lifetime tracker – bbr+0.48% – taken out a very long time ago
Real world benefits
1) Having accessibility to your savings in the offset arrangement at anytime
2) Reduced monthly mortgage payments – saving interest being paid (so savings interest but in reverse and of course tax free)
3) Not having to remortgage every 2 to 5 years
4) Being able to settle the mortgage at anytime – but so long as it’s fully offset there’s incentive to keep it going until term as access to cheap money at any time if needed.
I was lucky to be in the right place at the right time.
It is such a pity these aren’t more common in the UK – it is standard structure in Australia and great for liquidity for the customer to fund renovations etc, and for the lender means you have a customer for life if you structure it well.
I ran the same numbers here and agree it isn’t worth it, so now have the tedium of paying tax on interest too.
My friend is a self-employed IT contractor. Between contracts, he uses his Virgin Money offset mortgage as a financial cushion, which he says is cheaper than using his business account overdraft. Personally, I’d charge more for my work to build a proper buffer between jobs.
I still have around 12 years left on my offset tracker at 79bps over base. Have FIRED now but keep it drawn with a High yield portfolio in an ISA offsetting it to cover the interest payments and make a spread (c.4-5%). All gone well so far though appreciate this may not be for everyone.
I really love the collective faith in the continuation of the same old same old. I get the big picture, ownership counts for ‘owt if you can’t defend it, so spin the lot on red.
I wish I were young enough to have faith in the system to arbitrage one massive debt against the hope of a win in the AI boom. I just ain’t got the balls, but the best of British luck to y’all 😉