'Hugely underused' mortgage type 'ideal for people with savings'

"Underused" offset mortgages should stage a comeback, according to brokers, with a significant number of borrowers completely unaware they even exist. Offset mortgages allow homeowners to consolidate their savings and mortgage under one roof, rather than holding them with entirely separate banks.

The lender deducts your savings balance from your outstanding mortgage balance prior to calculating your monthly interest. Your savings are not lost - instead, they remain in an accessible account while acting as a financial buffer against your mortgage debt.

Offset mortgages first emerged as an innovation in the late 1990s, but following the global financial crisis and a prolonged period of near-zero interest rates, they quietly fell out of favour. Brokers noted they are particularly well-suited to the self-employed, higher earners and those with variable incomes - though the headline interest rate may not always be the most competitive, and if insufficient savings are maintained in the linked account, the advantage can quickly diminish.

'Hugely underused'

Hannah Vandervennin, director and mortgage adviser at The Mortgage Consultancy, described offset mortgages as hugely underused.

She added: "Offset isn't underloved by borrowers, it's been abandoned by lenders. Here's what should bother people: we're being nudged into longer and longer mortgage terms, paying interest for decades more than our parents did, while one of the few tools that actually cuts the interest you pay is quietly disappearing.

"Offset lets your savings sit against your loan so you only pay interest on the difference and you keep full access to the cash. Only two mainstream lenders still offer it to new borrowers now; it largely survives in private banking. And it isn't just for high earners.

"Anyone sitting on money doing nothing, an inheritance, a pot set aside for school fees, an emergency fund, can put it to work cutting their mortgage bill instead of leaving it idle. It's hugely underused in buy-to-let too, where rental income and reserves could sit as a constant reserve against the loan. There were dozens of these products a decade ago. Most simply don't exist any more."

Offset mortgages 'not understood'

Nouran Moustafa, practice principal and IFA at Roxton Wealth, highlighted that a significant number of borrowers fail to grasp how offset mortgages actually work.

She added: "Offset mortgages are definitely underused, but mainly because they are misunderstood. Most people are trained to ask 'what is the cheapest rate?' rather than 'how can my mortgage and savings work together?' The real strength of an offset mortgage is flexibility. Your savings stay accessible, but they reduce the mortgage balance interest is calculated on.

"They should make a comeback as that can be powerful for higher earners, self-employed clients, business owners, people with bonuses, or families holding large emergency funds who do not want money locked away. The downside is that the headline rate may not always be the cheapest, and if the client does not keep meaningful savings in the linked account, the benefit can disappear.

"It also needs discipline; easy access to savings is useful, but only if the money actually stays there. Offsets are not magic, but for the right client they can be a very intelligent planning tool. They deserve more attention because they solve a behaviour problem, not just a rate problem."

Cash needed

Philly Ponniah, chartered wealth manager and financial coach at Philly Financial, warned that borrowers would need a substantial sum of money for the arrangement to prove worthwhile.

She added: "Offset mortgages are underused, particularly among higher earners and self-employed professionals who hold large cash balances. They work especially well for my barrister clients, who often need significant sums set aside for their January and July tax payments.

"Rather than leaving that cash in a standard savings account, they can use it to reduce the interest charged on their mortgage while keeping it accessible when HMRC payments are due. The biggest advantage is flexibility. You're effectively earning a return equal to your mortgage rate, often tax-free, without locking money away, which also makes them useful for people with irregular income, bonuses or lump sums.

"The downside is that they can carry higher interest rates than standard deals, so the benefits depend on how much cash you consistently hold. They're often overlooked because they're slightly more complex and many borrowers aren't aware they exist. For the right person, though, they're an efficient use of cash."

Missed opportunity

Richard Davidson, mortgage advisor at onlinemortgageadvisor.co.uk, described offset mortgages as a "missed opportunity".

He added: "Offset mortgages were one of the first real innovations this market saw back in the late 1990s, but after the credit crunch and years of near-zero interest rates they quietly fell out of fashion. That feels like a missed opportunity, because with rates higher again, savings actually earning something, and app-based banking making it easy to link accounts, this should be exactly the moment lenders rediscover them.

"The honest problem is that very few products exist and almost nobody has bothered to explain them in years, so clients struggle to see the benefit and lenders chase simpler stories like low deposits or stretching affordability. Yet for anyone sitting on decent savings, especially the self-employed or higher earners, an offset can be a genuinely efficient way to cut interest and keep your cash within reach. They are underloved, and I think that says more about marketing than merit."

Better rates

Harry Goodliffe, director at Winchester-based HTG Mortgages, suggested people ought to be able to utilise their savings to secure a more competitive mortgage rate.

He added: "Too many savers are earning less on their savings than they're paying on their mortgage. That's exactly where an offset mortgage can make sense. The biggest positive is flexibility; your savings remain easily accessible while reducing the interest charged on your mortgage. The downside is that offset products are often more niche, limit your number of lenders and may not always offer the lowest headline rate, which is why they're sometimes overlooked."

Availability issue

Aaron Strutt, product and communications director at London-based Trinity Financial, noted that numerous lenders didn't provide them.

He added: "Homeowners can potentially save thousands of pounds in interest payments with offset mortgages, but many lenders do not provide them. At the moment there are approximately five lenders offering offset mortgages. The most well-known banks and building societies that provide them include Accord Mortgages, Barclays and Coventry for Intermediaries.

"For wealthier clients looking for larger mortgage loans, Coutts also has some offset mortgages. Unfortunately, the biggest provider of offset mortgages, Scottish Widows Bank, announced in October 2023 that it would exit the new business mortgage market to focus on equity release loans.

"Family Building Society also pulled its offset mortgages. With so many homeowners making overpayments on their mortgage, offset mortgages should be more popular. They are great for the self-employed, higher earners and borrowers with variable incomes."

Lesser-known product

Thomas Boughton, founder at London-based Artillium Real Estate Finance, revealed that a great number of people had never even heard of them.

He added: "Offset mortgages remain one of the market's most overlooked products, with many borrowers unaware of the flexibility they offer. They can be particularly beneficial for self-employed clients who are holding funds aside for a future tax bill, allowing that money to reduce mortgage interest while remaining fully accessible when needed. They're also well suited to borrowers expecting a future lump sum, such as an inheritance, asset sale or bonus, providing immediate interest savings without locking away their cash."

Scott Taylor-Barr, principal adviser at Leicester-based Barnsdale Financial Management, said they were still used by barristers.

He added: "Offset mortgages are a brilliant tool for the right people and can be a fantastic way to maximise the cash savings you have, with negligible risk, to help you repay your mortgage sooner and so pay far less interest over the term. I specialise in mortgages for legal professionals, in particular barristers, a group of people who are predominantly self-employed and so must save for their income tax and VAT liabilities.

"Putting these savings to work within an offset mortgage is a brilliant way for them to still have the cash available, with little risk, no income tax liability - as no interest is being earned on the savings, it's being saved on the mortgage - and ultimately a mortgage that is repaid sooner. There is a higher rate of interest charged by lenders for offset mortgages, so it is important to ensure that the benefit you are going to see is sufficient to negate that small extra interest charge."