Updated: January 17, 2022

Interest-Only Offset Mortgages

Considering an interest only offset mortgage? They hold lots of advantages! Find out what they are, the pros, cons and how to get one in our in-depth guide.

Get Started
Ask Us A Question

Ask a quick question

We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Interest Only Mortgages Ask us a question and we'll get the best expert to help.

FCA Logo
1 of 3
£
£
£
2 of 3
3 of 3 Send!

No impact on your credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: January 17, 2022

When it comes to taking out a mortgage, you may be surprised about the number of options available to you. One of the most interesting choices is an interest-only offset mortgage. They can be hard to find, but some lenders do still offer this type of loan.

This guide will cover everything you need to know about using an offset interest only mortgage. This will include exactly how they work, why you might want this type of loan, and where you can get help finding an offset mortgage.

What is an interest only offset mortgage?

This is a type of interest-only mortgage where you use a bank or savings account balance held alongside the loan to offset the total sum, and pay a lower amount of interest. Offsetting the amount you have in savings against the whole mortgage just means that you are effectively paying interest on a smaller loan.

For example, if you took out a mortgage for £250,000 and had £25,000 in a savings account, using an interest-only offset mortgage would mean that you only pay interest on £225,000 of the loan. Because it’s still an interest-only mortgage, you will need a ‘repayment vehicle’ that can cover the outstanding balance left at the end of the term.

Having the savings sit alongside the mortgage also means you can dip into the funds as an overpayment tool if necessary. However, if you withdraw money from the savings pot for other reasons, the repayment amount would then increase in proportion to how much you’ve used.

Speak to a mortgage expert today

Get Started

Why you might want an interest-only offset mortgage

An interest-only mortgage with an offset component has some unique advantages and disadvantages when compared to other types of home loans.

Here’s a breakdown of the main pros and cons to consider:

Advantages

  • Pay less interest over your mortgage term.
  • The ability to pay back the loan over a shorter period.
  • Possibility of lower monthly repayments.
  • Flexibility to withdraw and use the savings if needed.
  • The savings you make in interest payments can be more than you would have earned with a savings account.
  • Not earning interest on your savings means you won’t pay tax or use up your Personal Savings Allowance.
  • Some lenders will allow you to use a mixture of savings, ISAs, and current accounts to offset the mortgage.

Disadvantages

  • Some lenders charge higher interest rates for offset mortgages.
  • Usually, a large amount of savings is necessary (often around 25% of the property value).
  • Savings may be more useful going towards increasing the size of your deposit.
  • Using the offset savings balance increases your repayment amount.
  • The necessary loan-to-value (LTV) is usually lower than conventional mortgages.
  • Often the savings account has to be with the same lender providing the mortgage.
  • Early repayment charges can apply.
  • You might be left in a difficult situation if your repayment vehicle fails to pay out

Eligibility, income and deposit requirements

Similar to other types of interest-only mortgages, you’ll need to prove access to a repayment vehicle. This will be your plan to cover the remaining capital left at the end of the term.

The type of vehicle accepted can vary between lenders, but some common examples include:

Most lenders will also want a lower loan-to-value (LTV) than with a normal repayment mortgage. This lower LTV means that you’ll need a higher deposit for the property. The reason is that all interest-only mortgages carry a bigger level of risk for lenders.

With an interest-only offset mortgage, most lenders will require at least 75% LTV, which means a deposit of 25%. Some lenders may consider a slightly higher LTV, but you’d likely pay a higher rate of interest as a result.

Like with any mortgage, you will also need to pass credit checks and meet certain income requirements to prove you can repay the loan. Some lenders will have a minimum income requirement of at least £15,000 for an interest-only offset mortgage. But others will have a much higher pay threshold for a residential interest-only mortgage.

How a broker can help with your interest-only offset mortgage

This is a very unique type of interest-only home loan. So, if you’re looking to set up an offset mortgage, using a broker who specialises in this type of finance will be your best way of speaking to the right lenders.

Specialist brokers will have direct relationships with the lenders offering these mortgages. So they can put you in touch straight away. This is going to save you a lot of time (and potentially money) than if you were to try and do all this legwork yourself.

Not only can a broker help find you an appropriate interest-only mortgage deal, but they can also assist with managing your offset application from start to finish.

Getting the best rates

There are not many lenders offering interest-only offset mortgages, and not every lender will suit your circumstances. So it’s important that you deal with the ones who can offer you the right solution for the best price.

Increasing your deposit amount, proving a high income, or having access to a large level of savings is going to be your best bet of being offered a competitive rate. It may not be realistic to do all this, but maximising each aspect gives you a better chance of lower rates.

The advisors we work with will be able to introduce you to suitable lenders. And more importantly, pair you up with the ones offering the best deals for your personal situation. This tailored service means a much better chance of finding the best possible interest-only offset rates.

Alternatives to consider

It may also be worth exploring some alternatives to interest-only offset mortgages.

Some examples to consider include:

  • Offset repayment mortgage – if you have a repayment vehicle alongside a 25% deposit and a high level of savings to offset, then it may work out better value to find a great repayment deal.
  • Part and part mortgage – setting this up means you can pay the interest on the loan and also make some level of repayment. This would leave you with a lower amount of capital needed to pay the balance at the end of the term.
  • Joint mortgage – by combining your application, you might be able to boost your deposit amount. And, have a lower monthly payment by splitting the costs with someone else.
  • Interest-only mortgage – if you can’t meet the higher deposit requirements whilst also maintaining a large chunk of savings for an offset mortgage, then it could be worth looking into a standard interest-only home loan. But you would still need proof of a repayment vehicle and a large deposit (depending on the lender).

Getting matched with an interest-only offset mortgage expert

Using an interest-only offset mortgage can be a great way to maintain some flexibility and lower the overall interest you pay for your property. But the unique nature of these mortgages means that your best chance of finding a lender offering offset mortgages will be by using a broker who specialises in these products.

We work with offset mortgage experts who can match you up with the right lenders and find you the best deals. Having them there to walk you through the whole process can make the experience much easier and potentially save you time and money. They’ll be able to assist with each step of your application and then advise you on the best course of action.

Our free broker-matching service means we will pair you with an experienced expert who has a complete understanding of interest-only offset mortgages. All you need to do is call 0808 189 0463 or make an enquiry and we’ll set up a free, no-obligation chat between you and your ideal mortgage broker today.

Ask a quick question

We can help! We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Interest Only Mortgages Ask us a question and we'll get the best expert to help.

FCA Logo
1 of 3
£
£
£
2 of 3
3 of 3 Send!
Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

Get Started