Offset Mortgages | How They Can Help You Settle Your Loan Faster

Introduction

Gemma:
Offset mortgages allow you to blend a traditional mortgage with one or more deposit accounts with the same financial institution. Today, we’re giving you our best tricks to settle an offset mortgage faster.
Welcome back to Let’s Talk Money and Mortgages! I’m Gemma, and here at WIS we talk about money, mortgages, and positive money mindset. Be sure to subscribe and hit the thumbs up so you don’t miss future videos.
On today’s episode, we’re joined again by Iftaka (“Ifthi”), a trained accountant, mortgage advisor with over 10 years of experience, and one of the founding directors at WIS.

1. What is an offset account?

Gemma: Let’s start simple—what is an offset account?
Ifthi:
An offset account is basically a savings account linked to your mortgage.
Example: If you have a £200,000 mortgage and £50,000 savings in the linked account, you’ll only be charged interest on £150,000.
You don’t actually lose access to your £50,000—it’s flexible, but it acts like a deposit reducing interest charged.

2. What are the types of offset mortgages?

Gemma: What types of offset mortgages are there?
Ifthi:
Type 1 – Reduces monthly payments:
Your savings offset interest and lower your monthly payments.
Helps with cash flow, but not with settling the mortgage faster.
Type 2 – Reduces loan balance:
Interest savings are automatically set against your loan outstanding.
This reduces your mortgage balance faster, potentially shortening a 25-year term to 22–23 years.
This is the option to go for if your goal is to settle the mortgage faster.

3. Do offset mortgages come with fixed and variable rates?

Gemma: Can you get offset mortgages with both fixed and variable rates?
Ifthi:
Yes, it depends on the lender.
Fixed rate: Interest on both your mortgage and savings stays the same during the deal period (e.g., 2% for 2 or 5 years).
Variable rate: Interest moves with the Bank of England base rate. There’s risk, but also potential savings.

4. Do you pay tax on interest from offset accounts?

Gemma: A little birdie tells me you don’t pay tax on interest from offset accounts. Is that true?
Ifthi:
That’s correct.
Since you’re not physically receiving interest (it’s offsetting your mortgage), no tax is payable.
For higher-rate taxpayers (40%+), this can be a huge saving.

5. Should you use your rainy-day funds in an offset?

Gemma: What about rainy-day funds—how do they fit in?
Ifthi:
Many people keep emergency funds in low-earning accounts.
With offset, you can park them there instead.
You still have full flexibility to withdraw them if needed, but while they’re there, they reduce your mortgage interest and help shorten your term.

6. What about spare cash each month?

Gemma: You also mentioned using spare cash—how does that work?
Ifthi:
Be disciplined with end-of-month leftover cash.
Example: After bills are paid but before your next salary, transfer the spare into the offset account.
Even small amounts (like £5 a month) add up over time since interest is calculated daily.
Many clients also park tax money here until it’s due—again, reducing interest in the meantime.

7. Can you connect offset accounts to business accounts?

Gemma: Can offsets be connected to business accounts?
Ifthi:
Some banks allow you to connect both personal and business accounts to your mortgage.
This is powerful because client payments often leave large balances in business accounts, even temporarily.
Since offset interest is calculated daily, even a few days’ balance can save you money.

8. How does this differ from a director’s loan?

Gemma: How is this different from using a director’s loan?
Ifthi:
A director’s loan means withdrawing money from your company to use in the offset.
Some banks don’t allow business accounts directly, so this can be a workaround.
Tax rules apply—directors can borrow up to £10,000 tax-free (check with your accountant).
Unlike business account linking, this involves formally borrowing from the company.

9. Can offsets replace lump-sum overpayments?

Gemma: Could an offset be used instead of making lump-sum overpayments?
Ifthi:
Yes, and it offers more flexibility.
Example: A client gets a £50,000 bonus. Instead of paying it straight into the mortgage (which is irreversible), they put it in the offset.
This achieves the same interest savings, but if they later need funds (e.g., for a car or renovations), they can withdraw them easily.
It’s like having an interest-free loan, provided the savings equal the mortgage balance.

10. Are there drawbacks to offset mortgages?

Gemma: Offsets sound great—but what are the drawbacks?
Ifthi:
Premium rates: Offsets can carry slightly higher interest rates compared to standard mortgages.
Not for everyone: They work best if you have significant savings. For example, £5,000 savings may help on a £100,000 mortgage, but not much on larger ones.
Transaction delays: Some banks take 2–3 days to move money in/out of the offset, so it’s not as instant as a current account.
Different bank rules: Not all lenders operate offsets in the same way—always check with an advisor to ensure the product suits your objectives.

Final Thoughts

Gemma:
Thank you, Ifthi—those were some excellent tips.
Reminder:
These points may not apply to everyone. Always check with an advisor before deciding.
If you don’t have an advisor, our WIS team is happy to help.
A mortgage is secured against your home or property and may be repossessed if you do not keep up repayments.
We’ll be back next week with another episode of Let’s Talk Money and Mortgages. Stay safe, and see you soon!