How an offset mortgage works, and what to weigh

What is an offset mortgage?

An offset mortgage links your mortgage to a savings account, and sometimes a current account, usually held with the same lender. Interest is charged on the mortgage balance less the money in the linked accounts, not on the whole loan. The savings are not used to repay the mortgage: they stay yours, but they usually earn no interest while they are linked.

Offsetting is a feature, not a rate type, and the guide to the types of mortgage explains those. This guide covers how one works, the arithmetic, and the factors that count for and against offsetting. It is information, not advice, and it reaches no verdict for you.

How does an offset mortgage work?

The lender works out your interest on the difference between two balances: what you owe on the mortgage and what you hold in the linked accounts. With a £200,000 mortgage and £20,000 in linked savings, interest is charged on £180,000.

Two things follow from that:

• The loan itself is still £200,000. Linking savings does not repay any of it.
• If you add to the savings, the interest falls. If you withdraw them, it rises again.

The accounts that can be linked

Products differ in what they link. The Financial Services Compensation Scheme (FSCS), in a guide written for banks and building societies, describes the two most common structures:

• A savings or current account that is usually kept separate from the mortgage, with its balance set against the mortgage when interest is worked out.
• A current account combined with the mortgage in one account, which operates as one large overdraft with a credit limit.

This guide describes the first unless it says otherwise. Which accounts can be linked, and how quickly money can be withdrawn, depend on each product's terms.

Lower payments or a shorter term

The interest saved can reach you in one of two ways. A product can keep your monthly payment the same, so more of each payment repays the loan and the mortgage ends sooner. Or it can recalculate a lower monthly payment and leave the term as it is, which frees room in the monthly budget and saves less interest overall. Products differ, and some may let you choose, so the lender can confirm which applies.

What the lender must tell you

The rules of the Financial Conduct Authority (FCA) on mortgage information sit in its mortgage conduct rulebook, known as MCOB. For most mortgages taken out to buy a home, the illustration a lender gives before you apply is a standard document called the European Standardised Information Sheet (ESIS). Where the mortgage has a linked savings account or a linked current account, the rules require the ESIS to list it as an additional feature. It must give a brief explanation of the circumstances in which you can use the feature, any conditions attached to it, and the firm providing it if that is not the lender. Where a feature involves savings, the firm must explain the relevant interest rate. Charges on a linked account must appear in the tariff of charges that the lender provides with its mortgage offer.

Offset mortgage rates: how they can compare

This guide quotes no rate, because rates change often and differ by lender.

Whether offsetting is offered at all varies by lender and by product. MoneyHelper, the government-backed guidance service, lists limited access to discounted rate deals among the drawbacks of offsetting.

The rate and fees on an offset deal can differ from those on an ordinary deal, and can be higher. Whether they are, and by how much, varies by lender and over time, so the comparison that counts is between the deals on offer on the day. The guide to mortgage fees lists the fees to look for.

Rates on both sides also move. The Bank of England explains that when Bank Rate rises, banks usually charge more on loans and offer higher interest on savings, and that the reverse happens when it falls. The mortgage rates comparison shows what lenders publish for ordinary deals at your price and deposit, as an illustration, and the guide to loan to value explains how the deposit sets the deals open to you.

Offset mortgage calculator: the arithmetic

An offset mortgage calculator does one sum: it takes the savings off the loan before working out the interest. The interest saved in a year is roughly the linked savings multiplied by the mortgage rate.

Comparing an offset deal with an ordinary one

This guide types no rates, so the comparison is set out as the three amounts to work out, each for one year, from the rates you are offered.

The offset deal costs less for the year when the first amount is larger than the other two added together. Two things follow, whatever the rates are:

• The second amount is the same however much you save. The gap between the first and the third grows with your savings, where the mortgage rate is above the savings rate you would keep after tax. So the more you keep linked, relative to the loan, the more a difference in rate can be outweighed.
• Where the two deals have the same rate and fees, the second amount is nil, and the comparison is the mortgage rate against the savings rate after tax, as it is for an overpayment.

This is a one-year sketch that ignores the loan repaid during the year, and a full comparison runs over the whole deal period.

Running your own figures

This site has no offset calculator. The mortgage calculator shows the monthly payment for a price, deposit, rate and term you choose, and the mortgage overpayment calculator shows the interest saved and the time taken off by a lump sum. Entering your savings as the lump sum gives a rough guide to an offset that keeps your payment the same, if the savings stayed at that level for the whole term. It is only a rough guide, because offset savings can be withdrawn and an overpayment cannot.

Tax on savings held against an offset mortgage

Tax is charged on interest that savings earn. Savings linked to an offset mortgage usually earn none, so there is usually no savings interest from them to be taxed or to count towards your allowances.

Interest earned in an ordinary savings account can be taxable. GOV.UK sets out these allowances, which apply each tax year (6 April to 5 April):

• The Personal Savings Allowance lets basic rate taxpayers earn £1,000 of interest tax free and higher rate taxpayers £500. Additional rate taxpayers have no allowance.
• If your other taxable income is less than £17,570, the starting rate for savings can make up to £5,000 of interest tax free. Every £1 of other income above the Personal Allowance reduces it by £1.

GOV.UK says that if your savings interest is more than your allowance, you usually pay Income Tax on the amount above it. For a saver whose interest is within the allowances, the comparison is the mortgage rate against the full savings rate. For a saver who has used them, it is the mortgage rate against the savings rate left after tax, which moves the sum towards offsetting.

Offset mortgage or overpaying

Offsetting and overpaying reduce the interest in the same way: both shrink the balance that interest is charged on. The differences are about access and limits.

Money in a linked account has not been repaid to the lender, so it is not an overpayment. An overpayment beyond a deal's allowance can trigger an early repayment charge, and the guide to mortgage overpayment sets out how those limits work. An offset deal may allow overpayments as well, within its terms.

Are offset mortgages worth it?

There is no single answer. It depends on the rates and fees on offer on the day, how much you hold in savings, how long it stays there and the tax you pay on savings interest.

Factors that tend to count for offsetting:

• Savings that are large relative to the loan, and that are expected to stay linked.
• A wish to keep that money within reach, not locked into the mortgage.
• Savings interest that would be taxed, because the allowances above are used up.
• Income that arrives unevenly, such as bonuses or self-employed profits, with cash held between payments.

Factors that tend to count against it:

• Little in savings, or savings that will soon be spent, so the interest saved is small.
• An offset deal with a higher rate or fees than an ordinary deal open to the same borrower.
• A savings account elsewhere that pays more, after tax, than the mortgage interest saved. MoneyHelper lists being able to earn more on savings in another account among the drawbacks.
• A wish to clear the debt for good, which overpaying does and offsetting does not.

A qualified, regulated mortgage adviser can compare an offset deal with an ordinary one on your own figures. The guide to using a mortgage broker explains how advisers work and how to check that one is authorised.

Family offset mortgages

Some lenders may let a relative's savings be linked to a borrower's mortgage, an arrangement often called a family offset mortgage. The relative's money reduces the balance that interest is charged on. Whether this is offered, whose savings can be linked, whether they earn interest, how long they are tied up and what happens to them if payments are missed all vary by lender.

The guide to the guarantor mortgage explains other ways a family can support a mortgage and the risks a relative takes on.

Offsetting on a new build

Offsetting works the same way on a new home as on any other, but a buyer of a new home may hold cash for a while.

Money kept back for flooring, blinds and furniture may be spent over months, and held in a linked account it reduces the mortgage interest until it is spent. The benefit falls as the balance does, so any difference in rate over the whole deal is set against savings that may soon be gone.

The same goes for a self-employed buyer holding money for a tax bill, and the guide to the self-employed mortgage explains how lenders assess that kind of income.

The guide to new build mortgages explains the conditions lenders set for new homes.

How offset savings are protected

Savings with a UK-authorised bank, building society or credit union are protected by the FSCS if the firm fails. FSCS says it will compensate up to £120,000 per eligible person, per bank, building society or credit union, a limit that rose from £85,000 on 1 December 2025. A joint account is protected up to the same limit for each eligible person. Banks in one group that share a banking licence are treated as one bank, so money held across them shares a single limit.

Would FSCS deduct what you owe on the mortgage? In its guide for deposit takers, dated January 2021 and revised in December 2025, FSCS says that a debt owed to a deposit taker is not subtracted from the deposit when the protected deposit is calculated. Where the deposit account is identified as separate from the mortgage balance, it says compensation should be calculated on a gross basis. Where the deposit account is combined with the mortgage account, it says the single balance would have to be treated as a debt to the bank, like an overdraft, and no compensation would be payable.

That guide is a technical document for firms, which says of itself that it is not legally definitive, and it is not a statement about any one product. The lender can confirm how its offset accounts are structured.

Applying: affordability and loan to value

FCA rules require the lender to assess whether you will be able to make the payments, taking full account of your income and spending. Linked savings do not reduce the loan, and they can be withdrawn, so a lender may assess the full amount you borrow, not the loan less your savings. Each lender's own policy decides, and the lender or an adviser can confirm it. The guide to mortgage affordability explains the checks, and the affordability calculator gives an estimate of what you could borrow.

Loan to value works on the loan too: it is the loan as a share of the home's value, and savings in a linked account do not repay any of the loan.

When an offset deal ends, the guide to remortgaging explains the switch, and the remortgage calculator compares the options with fees included.

Questions to ask before you choose

1. Which accounts can be linked, and do the linked savings earn any interest?
2. Does the saving lower the monthly payment or shorten the term, and can you choose?
3. How do the rate and the fees compare with the lender's ordinary deal at the same loan to value?
4. Can the savings be withdrawn at once, and is there a minimum or maximum balance?
5. What overpayments does the deal allow, and what is the early repayment charge?
6. How much do you expect to hold in savings over the deal period, on a cautious view?

The mortgage hub gathers the calculators, the lenders' published rates and the other mortgage guides.