Calculate how your savings can reduce your mortgage interest and repayment time
An offset mortgage links one or more savings or current accounts to your mortgage. Instead of earning interest on your savings, your savings balance is deducted from your mortgage balance when calculating interest. You still owe the full mortgage amount, but interest is only charged on the difference between your mortgage and savings balances.
For example, if you have a £250,000 mortgage and £40,000 in linked savings accounts, you only pay interest on £210,000. With an interest rate of 4.5%, this saves you £1,800 per year in mortgage interest. Your savings do not earn any interest, but because mortgage rates are almost always higher than savings rates (especially after tax), the net effect is positive.
Most offset mortgages allow you to choose between reducing your monthly payment or keeping the same payment and shortening the mortgage term. Keeping the same payment is typically the better option, as it maximises your interest savings over the life of the mortgage.
If you pay 40% or 45% income tax, savings interest is taxed at a high rate. With an offset mortgage, the interest saving on your mortgage is effectively tax-free. A basic-rate taxpayer with £30,000 savings at 3% earns £900 gross but only £720 after tax. Offsetting that £30,000 against a 4.5% mortgage saves £1,350 — nearly double.
The more savings you have to offset, the greater the benefit. Offset mortgages become particularly worthwhile when your savings represent 15% or more of your mortgage balance. With smaller savings, the slightly higher mortgage rate may outweigh the offset benefit.
If you are self-employed and need to keep cash reserves for tax bills or irregular income, an offset mortgage lets you reduce mortgage interest while maintaining access to your funds. You can build up savings for your tax bill while offsetting the balance against your mortgage.
Some lenders allow family members to link their savings to your mortgage. This can help first-time buyers — parents can offset their savings against their child's mortgage without giving away their capital. The family keeps ownership of their savings while helping reduce the mortgage interest.
| Feature | Offset Mortgage | Regular Overpayments |
|---|---|---|
| Access to funds | Savings remain accessible at any time | Generally cannot be withdrawn once paid |
| Interest rates | Slightly higher than standard mortgages | Standard mortgage rates apply |
| Flexibility | Can add or withdraw savings freely | Subject to annual overpayment limits (usually 10%) |
| Best for | Those who want flexibility and have large savings | Those committed to paying off mortgage faster |
| Tax efficiency | Excellent — mortgage interest saving is tax-free | Good — reduces taxable interest but savings earn nothing |
Both strategies reduce the interest you pay on your mortgage. The right choice depends on how much flexibility you need and whether you might need access to the money in future. If certainty is more important than flexibility, overpaying may be simpler and cheaper due to the lower mortgage rate.
This calculator provides estimates based on simplified assumptions. Actual savings will vary based on how your savings balance changes over time. Consider seeking independent mortgage advice for your specific situation.
Related: Compare with our overpayment calculator, check your LTV ratio, and read about mortgage reduction strategies.