Pay Notiong With An Offset Mortgage

Interest rates have been on the rise, and most of your monthly mortgage payments may have increased significantly. However, if you have some money sitting in your bank account, did you know that you could use it to offset your mortgage? To find out more, stay tuned throughout the video.

I’m Pradeesh, and you’re watching WIS Mortgages, Accountancy, and Insurance.

Introduction

To decode the topic “Offset Mortgage”, I have with me Ifthikar Mohom, who has been an accountant and a mortgage advisor for over 10 years.

Pradeesh: How are you doing today?

Ifthikar: I am very well, thank you. How are you?

Pradeesh: Not bad. We last met in Galle when the weather was quite sunny. How is it in Colombo?

Ifthikar: It’s not too bad here. It’s very different from Galle, but Colombo is treating me very well too.

Pradeesh: That’s good to know.

What Is an Offset Mortgage?

Pradeesh: Many people may not be aware of offset mortgages or may not know what exactly it is. Can you explain?

Ifthikar: An offset mortgage is a beautiful product, especially if you have savings. It’s a savings account connected to your mortgage.

For example, if you have £100,000 in a savings account and a £200,000 mortgage, the bank connects the two. You only pay interest on the difference—£100,000. That’s what an offset mortgage effectively does.

Are There Different Types of Offset Accounts?

Pradeesh: Are there different types of offset accounts if I want to opt for one?

Ifthikar: Yes, there are two types:

Offset Interest Reduces Mortgage Balance:
Every month, the interest accrued offsets your mortgage balance.

Offset Interest Reduces Monthly Payment:
In this option, your monthly payments are reduced based on your savings balance.

The first option is more popular because it reduces your mortgage principal over time, whereas the second helps keep your monthly payments low.

Do You Pay Anything If Savings Equal the Mortgage?

Pradeesh: Let’s say I have £200,000 in savings and a £200,000 mortgage. Do I have to pay anything at all?

Ifthikar: No, that’s the beauty of it. If your savings equal your mortgage balance, you effectively pay zero interest.

I have a client in this situation—she still makes her regular payments, which reduces her mortgage faster. The advantage is that you can withdraw your savings at short notice whenever needed.

Can You Withdraw Savings from the Offset Account?

Pradeesh: If I withdraw money from my offset account due to an emergency, will it affect my mortgage payments?

Ifthikar: That’s a very good question.

If your money is in the offset account for 15 days and withdrawn for the other 15 days, you’ll pay interest for only 15 days. You can withdraw at any point—it’s a regular savings account, not a fixed deposit.

However, depending on your bank, allow two to three days for processing.

For the first type of offset account (where interest offsets the mortgage balance), withdrawals won’t affect your monthly payment.

For the second type (where savings reduce your monthly payment), withdrawals will increase your monthly payment for the period the funds are not there.

Many people use offset accounts creatively—for example, business owners store tax money in them until payment is due. Others deposit all their income into the offset account and move money back to their current account only when bills are due, maximizing interest savings.

When Is the Right Time to Withdraw Money from the Offset Account?

Pradeesh: When is the right time to take money out of the offset account?

Ifthikar: Keep your money in the offset account as long as possible. The longer it stays, the more you benefit.

Even £5,000 kept for an extra few weeks helps. If you don’t need the money until the end of the month, don’t move it out at the start.

Company directors, for example, sometimes put their director’s loans into the offset account temporarily to benefit from the arrangement.

Are There Any Conditions to Get an Offset Mortgage?

Pradeesh: Are there any conditions I need to meet to get an offset mortgage?

Ifthikar: No special conditions. An offset mortgage is simply a type of mortgage, like a fixed or variable one.

However, not all banks offer it. You must choose it at the outset, as switching later can be difficult—especially if you’re on a fixed-rate deal with early repayment charges.

Your advisor plays an important role here. They might look at your bank balances and recommend an offset mortgage if it suits your situation.

Can You Get an Offset Mortgage on Fixed or Variable Rates?

Pradeesh: Is it possible to get an offset mortgage on a fixed or variable rate?

Ifthikar: Yes, there are both options—fixed and variable (tracker or discount).

Availability depends on the lender. Variable rates have recently gained popularity, but both options exist.

If you haven’t watched our video comparing fixed vs. variable rate mortgages, click the card to watch it.

Can You Offset a Mortgage with Business Account Savings?

Pradeesh: If I have a business account with substantial savings, can I offset that with my mortgage?

Ifthikar: Yes, definitely. There’s a particular lender who allows this, subject to certain conditions.

If you have a business account and an offset mortgage with that lender, we can make it work. To find out who the lender is, call us on 0203 011 1986.

What Are the Pros and Cons of an Offset Mortgage?

Pradeesh: To summarize, what are the pros and cons of an offset mortgage?

Ifthikar:

Pros

Better Use of Idle Savings:
Many people have money in accounts earning little or no interest. Connecting it to your mortgage makes it work for you.

Tax Advantages:
Interest earned on normal savings is taxable. But with an offset mortgage, your “savings” benefit is tax-free.

Business Account Link:
Some lenders allow you to link business account balances to your mortgage for additional benefit.

Cons

Limited Lenders:
Not all lenders offer offset mortgages. Only a few do.

Higher Interest Rates:
Offset mortgages sometimes have slightly higher rates, which can reduce the benefit.

Not Suitable for Everyone:
If your savings are low (e.g., £5,000 on a £400,000 mortgage), it may not be worthwhile. Advisors can calculate if it’s right for you.

Reduced Benefit if Funds Are Withdrawn:
If you withdraw your savings, you lose the benefit. It’s best suited for funds you don’t need immediately.

Is an Offset Mortgage the Right Choice in the Current Market?

Pradeesh: With mortgage payments rising in today’s economy, is an offset mortgage the right choice?

Ifthikar: It can work very well for some people, but not for everyone.

For example, if you have a £400,000 mortgage, £200,000 savings, and an interest rate of 4%, you’ll effectively pay interest on £200,000—an effective rate of 2%. That’s much lower than current market rates.

It’s a basic example, but it shows the potential benefits. Speak to an advisor to calculate exactly how it would work for you.

Conclusion

If you’d like the right advice on getting an offset mortgage, call us on 0203 011 1986.

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Thank you for watching, and have a great day.