Questions and Answers for Offset Accounts UK Consumers

What are Offset Accounts? UK consumers have been asking this question more and more in recent years.

They combine your mortgage with your current and savings accounts, and sometimes your loans and credit cards. Interest earnt on your deposit accounts is offset against your mortgage interest. Offset accounts are a useful tool for mortgage reduction because they reduce the amount of interest payable on your mortgage. For example, if you had a £100,000 mortgage with savings of £10,000 you’ll only have mortgage interest repayments on £90,000 and you don’t receive interest payments on the £10,000.

Why don’t I receive interest on my deposit accounts?

The interest earnt on your deposit account is immediately offset against your mortgage interest repayments and is not taxed, therefore offsets are tax effective. For example, a £100,000 mortgage with an interest rate of 6% will cost you £6000 per year in interest payments with a standard mortgage. Whereas, with an offset account and savings of £10,000, you’ll pay interest on £90,000 and the interest repayments would be £5400. Your £10,000 investment has saved you £600. It would be difficult to find a safe investment for £10,000 which gave you this sort of tax-free return.

Do I need to have a lot of money in savings?

Most experts advise you should have ten to twenty per cent of the mortgage loan in savings to give the best return on offsetting.

I have a significant amount of debt; will this be a problem with Offset Accounts?

Some lenders suggest you can consolidate your debts with the mortgage. However this tends to lengthen the term of the debt and it also becomes a secured loan. Have a look at your spending habits because you will need to make regular repayments and where possible to make overpayments to get the most out of an offset account – otherwise an offset may not be suitable for your circumstances.

How flexible are Offset Accounts?

Not all offset accounts are the same and it is important to research the intricate details of the loan conditions. However, most offsets have the overpayment option without incurring fees. Once a set amount of overpayments have been made, then you can normally make underpayments or have a payment holiday as the need arrives. Offset accounts are a clever way of making your money work harder for you, if your circumstances are appropriate.

How many types of UK Offset Accounts are there?

There are two different types of offset accounts: current account mortgage and offset mortgage.

Do they work in the same way?

They work in slightly different ways. With a current account mortgage, your deposit and mortgage are combined into one account and your salary is paid into the account. You have one net balance for your deposits and debts. An offset account keeps your savings and borrowings in separate accounts. The total of the savings is offset against the total of the borrowing and the interest is calculated on the net figure.

Do I have to keep track of my spending?

You do need a lot of self-discipline because it can be harder to keep track of your monthly spending especially with a current account mortgage.

Is it easy to switch lenders?

Because the majority of your accounts are tied into one lender, it is harder to switch, but with some time and effort it can be achieved.

Is the interest rate higher?

You'll pay a little extra in terms of the base mortgage rate compared to, for example, a five year fixed rate deal.

Where can I obtain Offset Accounts?

Banks and building societies offer offsets, however it is advisable to seek independent impartial advice from a mortgage broker who will help you decide which, and if, Offset Accounts are suitable for you.