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):
| 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!
