{"id":350624,"date":"2025-12-19T02:55:19","date_gmt":"2025-12-19T02:55:19","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/does-the-offset-mortgage-advantage-still-add-up\/"},"modified":"2025-12-19T02:55:19","modified_gmt":"2025-12-19T02:55:19","slug":"does-the-offset-mortgage-advantage-still-add-up","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=350624","title":{"rendered":"Does the offset mortgage advantage still add up?"},"content":{"rendered":"


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G<\/span>rowing up, I was often told that paying off your mortgage was the best financial decision you could make.<\/p>\n

A funny lecture to give an eight-year-old, granted. But the thought got stuck in my head.<\/p>\n

Paying down debt makes for sexy headlines. Santander observed earlier this year that joining in with Dry January \u2013 and reallocating all of your booze money to overpaying your mortgage instead\u00a0\u2013 could wipe<\/a> \u00a328,373 off your mortgage payments over 25 years.<\/p>\n

I\u2019m thinking about taking up drinking for Christmas just so that I can join in by quitting again next year!<\/p>\n

If you read Monevator<\/em> though, you\u2019ll know that often the smarter decision is to invest<\/a> instead.<\/p>\n

But what if you\u2019re already investing as much as you want to, and you still find yourself having a few thousand pounds sitting around?\u00a0\u00a0<\/p>\n

Sure, you can make overpayments on your mortgage. But often after overpaying the first 10% of your mortgage value you\u2019ll incur penalties.<\/p>\n

And what if you suddenly want that money back?\u00a0Well, then your bank will typically have its fists tightly closed around your cash.<\/p>\n

Offset mortgages: the best of both worlds<\/h2>\n

Offset mortgages are a neat solution.\u00a0Monevator<\/em> has covered them in detail<\/a> before.<\/p>\n

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.<\/p>\n

If you\u2019ve got a \u00a3250,000 mortgage, say, and \u00a340,000 in cash savings, then you only pay interest on the remaining debt of \u00a3210,000.<\/p>\n

On paper it\u2019s a fantastic idea. There\u2019s no tax to pay on savings interest, you can make effectively unlimited overpayments, and you can withdraw your cash whenever you need it.<\/p>\n

Here\u2019s the catch<\/h3>\n

With my mortgage coming up for renewal soon \u2013 and having heard from so many offset mortgage fans over the years \u2013 I investigated to see if our next mortgage should be an offset.<\/p>\n

That\u2019s easier said than done, because these days, the offset mortgage sits in a murky and dusty corner of financial services \u2013 a relic of years past.\u00a0\u00a0<\/p>\n

Perhaps because rates were so low for so many years people forgot about them?<\/p>\n

Whatever the cause, I was disappointed to find many lenders don\u2019t offer offsets nowadays, or else restrict them to existing borrowers<\/a>. So as a prospective offsetter, you might struggle to find a suitable lender.<\/p>\n

Barclays (as of 16 December) offers a mere two offset mortgage options on residential purchases, compared to 28 products without offset functionality.<\/p>\n

Yorkshire Building Society (YBS) (as of 17 December) similarly offers two \u2013 from a total mortgage range of 11.<\/p>\n

So even for the few lenders that offer them, offsets are a niche product.<\/p>\n

Mortgage maths<\/h2>\n

Regardless, let\u2019s compare some of the options available (as of December) for customers with a 75% loan to value (LTV):<\/p>\n

\n\n\n\n\n\n\n\n
Lender<\/td>\nProduct<\/td>\nInitial Rate<\/td>\nFee<\/td>\n<\/tr>\n
Barclays<\/td>\nOffset 2 Year Tracker<\/td>\n5.22%<\/td>\n\u00a31,749<\/td>\n<\/tr>\n
Barclays<\/td>\nStandard 2 Year Tracker<\/td>\n4.21%<\/td>\n\u00a3999<\/td>\n<\/tr>\n
YBS<\/td>\nOffset 2 Year Fixed<\/td>\n4.09%<\/td>\n\u00a3995<\/td>\n<\/tr>\n
YBS<\/td>\nStandard 2 Year Fixed<\/td>\n3.69%<\/td>\n\u00a3995<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n

With Barclays you\u2019re paying a 1.01% higher rate for the luxury of having an offset.\u00a0And you can slap a \u00a31,749 fee on top of that \u2013 a full \u00a3750 higher than with the standard tracker.<\/p>\n

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.<\/p>\n

With Yorkshire Building Society, things are a bit better.\u00a0It only wants 0.4% extra on the mortgage rate.<\/p>\n

Higher rates and fees can destroy the benefits of offset mortgages<\/h3>\n

Now we\u2019ll put some real numbers on these scenarios.<\/p>\n

Let\u2019s say Peter wants to borrow \u00a3400,000 over 30 years.<\/p>\n

It\u2019s worth bearing in mind that just because Peter likes the look of the YBS products, that doesn\u2019t mean it will agree to lend against his property.<\/p>\n

Hence we\u2019ll imagine one scenario where he can only get a mortgage with YBS, and one where he can only go with Barclays:<\/p>\n

\n\n\n\n\n\n\n\n\n\n
Product<\/td>\nInitial Monthly Payment<\/td>\nCapital paid off after 2 years<\/td>\nInterest costs over 2 years + fee<\/td>\nTotal cost over 2 years<\/td>\n<\/tr>\n
Barclays \u2013 Offset 2 Year Tracker<\/td>\n\u00a32,202<\/td>\n\u00a312,236<\/td>\n\u00a341,209 + \u00a31,749<\/td>\n\u00a342,958<\/td>\n<\/tr>\n
Barclays \u2013 2 Year Tracker<\/td>\n\u00a31,958<\/td>\n\u00a314,439<\/td>\n\u00a332,563 + \u00a3999<\/td>\n\u00a333,562<\/td>\n<\/tr>\n
Barclays \u2013 additional cost for offset product<\/td>\n+\u00a39,396<\/td>\n<\/tr>\n
YBS \u2013 Offset 2 Year Fixed<\/td>\n\u00a31,931<\/td>\n\u00a314,719<\/td>\n\u00a331,612 + \u00a3995<\/td>\n\u00a332,607<\/td>\n<\/tr>\n
YBS \u2013 2 Year Fixed<\/td>\n\u00a31,833<\/td>\n\u00a315,547<\/td>\n\u00a328,451 + \u00a3995<\/td>\n\u00a329,446<\/td>\n<\/tr>\n
YBS \u2013 additional cost for offset product<\/td>\n+\u00a33,161<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n

With Barclays, Peter would cost himself a whacking additional \u00a39,396 for the luxury of having an offset mortgage.<\/p>\n

With YBS, he incurs an extra cost of \u00a33,161.<\/p>\n

Show me the money<\/h3>\n

Okay, that\u2019s the bad news out of the way. Time to unleash Peter\u2019s savings to start raking in those offsetting benefits, right?<\/p>\n

We\u2019ll 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\u2019s already used his \u00a3500 tax-free savings allowance<\/a>, and that he has no ISA space remaining.<\/p>\n

The offsetting benefits with an offset mortgage obviously depend on how much Peter actually has in savings.<\/p>\n

So let\u2019s look at four possible scenarios. (All the numbers are annual):<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n
Lender<\/td>\nSavings Amount<\/td>\n4.5% Savings Account (after 40% tax)<\/td>\nOffset (interest saved)<\/td>\nSurplus vs Savings<\/td>\nSurplus after additional interest and fees<\/td>\n<\/tr>\n
Barclays<\/td>\n\u00a325,000<\/td>\n\u00a3675<\/td>\n\u00a31,305<\/td>\n\u00a3630<\/td>\n-\u00a38,766<\/td>\n<\/tr>\n
\u00a350,000<\/td>\n\u00a31,350<\/td>\n\u00a32,610<\/td>\n\u00a31,260<\/td>\n-\u00a38,136<\/td>\n<\/tr>\n
\u00a3100,000<\/td>\n\u00a32,700<\/td>\n\u00a35,220<\/td>\n\u00a32,520<\/td>\n-\u00a36,876<\/td>\n<\/tr>\n
\u00a3200,000<\/td>\n\u00a35,400<\/td>\n\u00a310,440<\/td>\n\u00a35,040<\/td>\n-\u00a34,356<\/td>\n<\/tr>\n
YBS<\/td>\n\u00a325,000<\/td>\n\u00a3675<\/td>\n\u00a31,100<\/td>\n\u00a3425<\/td>\n-\u00a32,736<\/td>\n<\/tr>\n
\u00a350,000<\/td>\n\u00a31,350<\/td>\n\u00a32,200<\/td>\n\u00a3850<\/td>\n-\u00a32,311<\/td>\n<\/tr>\n
\u00a3100,000<\/td>\n\u00a32,700<\/td>\n\u00a34,400<\/td>\n\u00a31,700<\/td>\n-\u00a31,461<\/td>\n<\/tr>\n
\u00a3200,000<\/td>\n\u00a35,400<\/td>\n\u00a38,800<\/td>\n\u00a33,400<\/td>\n+\u00a3239<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n

Ouch!<\/p>\n

Okay, considering the savings income alone \u2013 achieved because the interest reduction from using an offset is not liable for income tax \u2013\u00a0Peter is indeed significantly better off with an offset, compared to keeping the cash in a taxable savings account.<\/p>\n

But the higher rates and fees that also come with the offsets quickly undo the gains.<\/p>\n

With the Barclays mortgage costing an extra \u00a39,396 in interest and fees, even if Peter had \u00a3200,000 to offset, he would still be better off on a standard tracker with his cash in a savings account.<\/p>\n

I don\u2019t 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.<\/p>\n

With YBS, only when allocating \u00a3200,000 in cash against the offset does it start to make sense. But Peter still only benefits by \u00a3239 after all the extra costs of the offset option.<\/p>\n

For my part, I wouldn\u2019t tie up \u00a3200,000 in an offset mortgage for such mean gruel.<\/p>\n

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.<\/p>\n

What is your goal with an offset?<\/h2>\n

It\u2019s easy to fall into a trap of making decisions because they feel good, rather than because they make financial sense.<\/p>\n

When people talk about how offset mortgages have enabled them to get out of debt faster by saving thousands in interest payments\u2026 well, it all sounds very enticing.<\/p>\n

Perhaps that was your experience. But given today\u2019s 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.<\/p>\n

True, there are a few scenarios where offsets might still make sense.<\/p>\n

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?<\/p>\n

The frustration for me is that offsets could be a really valuable product, especially with tax on savings<\/a> the latest target of the Chancellor.\u00a0<\/p>\n

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.<\/p>\n

So offset mortgages seem appealing for higher-tax rate taxpayers with cash to spare.<\/p>\n

There\u2019s 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.<\/p>\n

But as of today, their uncompetitive interest rates and fees make them unattractive for most.<\/p>\n

Your mortgage mileage may vary<\/h2>\n

As is probably obvious by now, I love the concept of offset mortgages.<\/p>\n

But unfortunately the numbers don\u2019t work for me.<\/p>\n

Even if I had 50% of my mortgage balance available in cash, I still wouldn\u2019t 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.<\/p>\n

If you need really do need to have lots of cash on hand \u2013 just in case, for some reason \u2013 then an offset may be worth considering.<\/p>\n

Perhaps better rates will be available by the time you come to remortgage, too.<\/p>\n

But as of right now, for most people I just don\u2019t see a case for paying more to offset.<\/p>\n

On the same note, if you already have an offset mortgage, then run the numbers to see if you\u2019re actually benefiting as much as you think you are. You may well find that with a standard \u2013 cheaper \u2013 mortgage product and your cash held in a competitive high-interest savings account, you\u2019d be better off overall.<\/p>\n

Even if it does mean sacrificing your beloved offset!<\/p>\n

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Thanks for reading!<\/b> Monevator is a spiffing blog about making, saving, and investing money. Please do sign-up<\/a> to get our latest posts by email<\/a> for free. Find us on Twitter<\/a> and Facebook<\/a>. Or peruse a few of our best articles<\/a>.<\/p>\n<\/div><\/div>\n