The latest data from the Financial Conduct Authority’s mortgage lending and administration return shows that in December 2022, there were 830,000 offset mortgages – a total of 7 per cent of all mortgages in the UK.
That is a rise from 710,000 mortgages in 2019 and, in today’s market, there is every chance that more and more clients will be asking about offset solutions, which take advantage of the gap between the interest rate given on savings accounts and mortgage rates.
How offset works
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.
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 £918bn in 2019 to £1.045tn by the first quarter of 2023.
Crucially, our own research suggests that almost £271bn of these savings are currently being stored in accounts that pay zero interest. With inflation running at 6.8 per cent 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.
The advantages of an offset mortgage
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 will not 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.
