Offset Mortgage

Overview

An offset mortgage links a mortgage loan to one or more deposit accounts held with the same lender. Instead of earning interest on those deposits, the account balances are used to reduce (offset) the mortgage balance on which interest is calculated. That lowers interest costs and can shorten the time it takes to repay the loan while allowing borrowers continued access to their savings.

Offset mortgages are common in countries such as the UK. They are generally not available in the United States; the closest U.S. alternative is an all-in-one or sweep-style mortgage.

How it works

• The mortgage lender calculates interest on the outstanding loan balance minus the combined balance(s) in linked deposit accounts.
  Example: mortgage principal $225,000 and savings $15,000 → interest charged on $210,000.
• Linked accounts typically do not earn conventional interest while they are offsetting the mortgage; rather, the benefit is the reduction in mortgage interest.
• Borrowers retain access to their funds. Withdrawing money increases the effective mortgage balance used for interest calculations.
• Multiple accounts — including family members’ savings in some programs — can often be linked to the mortgage to maximize the offset effect.

Example

A family has a £225,000 mortgage at 5% and £15,000 in a linked savings account with the same lender. Interest for the next period is calculated on £210,000 (225,000 − 15,000), lowering interest payments compared with a standard mortgage where savings and mortgage are separate.

Benefits

• Reduces the amount of mortgage interest paid, often faster than equivalent interest earned in a savings account because mortgage rates are typically higher than savings rates.
• Speeds up repayment of principal and can shorten the loan term.
• Maintains liquidity: savings remain accessible for emergencies or other needs.
• Tax-efficient in some jurisdictions because the benefit is achieved by reducing interest rather than reporting savings interest as taxable income.

Drawbacks

• Linked savings usually do not earn separate interest, so you forgo conventional interest earnings.
• Offset mortgages can carry higher mortgage rates or fees compared with standard mortgages.
• Fewer lenders offer them, so product choice may be limited.
• Not universally available — tax or regulatory environments (such as in the U.S.) may prevent them or make them rare.

Who should consider an offset mortgage?

• Savers who maintain significant deposit balances and want those balances to work toward reducing mortgage interest.
• Homebuyers who value flexibility and want access to emergency funds while accelerating mortgage repayment.
• Borrowers comfortable with slightly higher mortgage fees or rates in exchange for interest savings on the loan.

Alternatives

• All-in-one or current-account mortgages: combine mortgage and everyday banking to reduce interest in a similar way.
• Traditional mortgage plus separate high-yield savings or investment accounts: may be preferable if savings rates are competitive or if offset products are unavailable.

FAQs

Q: Do I earn interest on the savings linked to the mortgage?
A: Typically no; the savings reduce mortgage interest instead of earning separate interest.

Q: Can I withdraw money from the linked savings?
A: Yes — but withdrawals increase the mortgage balance used to calculate interest, which may raise your next payment.

Q: Are offset mortgages available everywhere?
A: Availability varies by country. They are common in places like the UK but are generally not offered in the U.S. due to tax and regulatory factors.

Q: Is an offset mortgage better than paying off the mortgage directly?
A: It depends on your priorities. Offset mortgages preserve liquidity while reducing interest; paying off the mortgage directly removes debt but can deplete savings.

Bottom line

An offset mortgage can be a powerful tool for borrowers who keep substantial savings and want to reduce mortgage interest without losing access to funds. Evaluate the trade-offs — including rates, fees, and product availability — and compare alternatives such as all-in-one mortgages or separate high-yield savings before deciding.