The benefits and risks of a UK offset mortgage loan

A UK offset mortgage allows you to keep your loan, savings, and current account balances in separate accounts, but where the cash account balances link and are offset against the loan balance. You only pay interest on the net loan balance of the combined accounts. This allows the possibility of reducing the monthly interest  payments, or repaying the loan early. A current account mortgage is a similar type of account but where your loan balance links to and is offset by a current account balance only .

For both the UK offset mortgage, the interest is calculated daily, so that paying your salary into a current account which links to the offset mortgage will save on interest payments as your normal cash flow will temporarily reduce the outstanding debt each month.

benefits

Typically, an offset mortgage will lead to lower interest payments providing you have a regular cash flow through the linked current account, and/or place money in a linked savings account.

All positive balances are offset against the loan. Most providers allow you to set up multiple savings accounts, so each member of a family can have individual accounts all offset against the mortgage for the family home

risks

You will not receive interest paid into the savings or current accounts. However the interest saved on the loan will be more than the interest you would have received, because savings interest rates are almost always lower than borrowing rates.

There may be times where, with some research, it is possible to find a better combination of mortgage and savings accounts where the net result is more favourable to you than an offset mortgage would be, although these opportunities tend to be rare and don't last for long.

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