Mortgage types
Offset mortgages: how the saving is calculated, and who it's worth it for
An offset mortgage does not pay you interest on your savings. It reduces the balance your mortgage interest is charged on by the amount you hold in a linked savings account, which is a different saving and, for most higher-rate taxpayers, a bigger one. Whether it beats a standard rate and a separate savings account depends on one number: how much you keep offset, and how long you keep it there.
What the offset reduces
With an offset mortgage, your linked current account and savings balance are subtracted from your mortgage balance before interest is calculated, every day. Hold £250,000 on the mortgage and £40,000 in the linked savings account, and you pay interest on £210,000. The savings still sit in an account you can withdraw from at any time; they just stop earning their own interest while they are offset.
That second point is what makes the maths different from a standard mortgage plus a separate savings account. A savings account pays interest, and if you are a taxpayer, some of that interest is taxed. An offset saving is not interest you receive at all, so there is nothing for HMRC to tax. For a 40% or 45% taxpayer, that difference is the entire case for offsetting.
The rate premium you're paying for it
Lenders price offset mortgages higher than their equivalent standard fix or tracker, typically by 0.3 to 0.7 percentage points. Fewer lenders write the product at all now: Yorkshire Building Society, Coventry Building Society, Scottish Widows Bank, Barclays and a handful of others still offer it, against a much longer list of lenders for a standard deal.
That premium is the cost of the flexibility, and it is only worth paying once your offset savings are large enough for the interest saved to clear it. Below that threshold, a cheaper standard rate elsewhere plus a normal savings account can beat the offset outright, even before tax is considered.
A worked example
Say you have a £400,000 mortgage on a 5.25% offset rate, against a standard equivalent fix at 4.85%, a 0.4-point gap. You keep £60,000 on deposit, offset in full.
On the offset deal, you pay interest on £340,000 at 5.25%, which is £17,850 a year. On the standard deal, you pay interest on the full £400,000 at 4.85%, which is £19,400 a year, but you also hold £60,000 in a separate savings account. To net the same £17,850 after tax as a 40% taxpayer, that account would need to pay a gross rate high enough to leave £1,550 after tax, which works out at roughly 6.5% gross. Few easy-access accounts pay that. The offset wins by a comfortable margin.
Now drop the savings balance to £15,000 against the same £400,000 mortgage. The offset saves interest on £15,000 at 5.25%, about £790 a year. The 0.4-point rate premium on the full £340,000 remaining balance costs roughly £1,360 a year on its own. At that balance, the standard rate plus a separate account wins, because the premium is charged on the whole mortgage while the saving only applies to the offset amount.
Where the crossover sits
The two examples above bracket where offsetting starts to pay off: broadly, once your offset savings sit above 15 to 20% of your outstanding balance, and you expect to keep most of that amount on deposit rather than spending it down within the deal term. Below that, the fixed rate premium outweighs what a smaller balance can save.
The calculation moves with three things: the size of the rate gap between the offset and standard deals a lender is quoting you, your marginal tax rate on savings interest, and how stable your savings balance is. Someone who dips into the same pot for regular expenses gets less benefit than someone holding it untouched, because the offset saving is calculated daily against whatever is sitting in the account that day.
Who it doesn't suit
If your savings will be spent within a year or two, on a house move, a wedding, school fees, an offset mortgage is still worth having, since the balance reduces less while the money is out, but it stops being the reason to choose the product over a cheaper standard rate. And if you are a basic-rate taxpayer with a modest savings buffer, the personal savings allowance already shelters most of your interest from tax, which narrows the gap an offset closes.
If you're weighing an offset against remortgaging into a lower loan-to-value band instead, that's a related but separate calculation: one is about what you hold in savings, the other about how much equity you've built.
Working it out on your own numbers
The two worked examples above use round figures. Your own balance, savings and the exact rate gap quoted by a lender will move the crossover point up or down, so it's worth running your real numbers before signing, not the example ones.
Our free timeline takes your mortgage balance and rate and shows what any given monthly change does to your finish date and total interest, which is the same underlying maths an offset saving relies on, just applied to overpayments instead of a linked savings pot.
Frequently asked questions
Is an offset mortgage worth it?
Usually only once your offset savings are worth 15 to 20% or more of your outstanding mortgage balance, and you expect to keep most of that amount on deposit for the deal term. Below that, the 0.3 to 0.7 percentage point rate premium lenders charge for the offset product tends to outweigh the interest it saves.
How is the offset saving calculated?
Interest is charged daily on your mortgage balance minus whatever is sitting in your linked current account and savings that day. It moves with your savings balance, so spending the money down reduces the saving immediately, and the saved interest is never paid to you or taxed, unlike ordinary savings interest.
Why is an offset mortgage more expensive than a standard rate?
Fewer lenders offer the product, and the ones that do price in the flexibility of daily-calculated offsetting, typically as 0.3 to 0.7 percentage points above their equivalent standard fix or tracker. That premium applies to your whole balance, which is why offsetting only pays off once your linked savings are large enough to clear it.
See what your own balance saves
Put your mortgage into the free timeline to see your interest and finish date update as you move the numbers. For a single payment per deal, we then watch your rate and remind you before it ends.
Examples are illustrative and rounded. Your own mortgage offer and lender confirm your actual figures and dates. This is information, not financial advice. For advice on your circumstances, speak to a mortgage adviser regulated by the FCA.