Offset mortgages are waning in popularity, experts say, although they can offer substantial benefits to some homeowners
There has been a decline in providers offering offset mortgages in recent years, with Clydesdale Bank, a part of Virgin Money, the latest to remove their rates from the market.
An offset mortgage essentially links your savings account, or in some cases your current account, to your mortgage with the same bank.
When you make a payment on your mortgage, the amount is “offset” by the balance of your savings account, and the interest is calculated on the difference between the two.
For example, if you had a £300,000 mortgage and £30,000 in your linked savings account, you would only pay interest on £270,000 of the mortgage.
Whilst it can save homeowners thousands in interest, rates are generally higher as the market is limited and most providers look for a deposit of 20 per cent or higher.
Many lenders have removed such mortgages from the market over the past couple of years, including First Direct, Family Building Society and Scottish Widows.
Jed Newton of brokers Trinity Financial said: “We have seen a gradual decline in the availability of offset mortgages, not because they are not good for clients but rather as are not profitable for lenders.
“They often end up being loss making products.”
Accord, Barclays and Coventry Building Society are now the notable providers of offset mortgages but the choice is limited.
David Hollingworth of brokers L&C Mortgages said: “The withdrawal by Clydesdale is yet another reduction in the number of offset deals on offer.
“It comes just at the point in time when customers may be looking to take advantage of the functionality of an offset deal.
“When interest rates were so low, there was less emphasis on offset and those with cash would often be comforted by the fact that the Personal Savings Allowance would mean that they didn’t incur income tax on their savings.
“Higher interest rates have changed that and borrowers are increasingly focused on reducing their mortgage bill.”
The Bank of England base rate now sits at 4 per cent – double its target.
High interest rates increase the amount of savings interest lost and can make the offset benefit less effective, as the rate on savings is usually lower than the mortgage interest rate.
There is no tax to pay as interest is not paid, but a higher-rate taxpayer would need to earn a gross savings rate of 8.33 per cent to get the same effective return as offsetting a mortgage with a rate of 5 per cent.
Another benefit is that offset mortgages also allow access to cash, unlike overpaying the mortgage.
Experts say demand for offset mortgages has waned and they are less profitable.
Nick Mendes of brokers John Charcol said: “Offsets have always been something of a niche product in the UK and take-up today is well under one per cent of new lending.
“They’re also less profitable and more complex to administer than standard mortgages, particularly given post-2008 capital rules. Lenders naturally prioritise products they can market widely, like fixed rates.”
He added, however, that doesn’t mean they lack value.
“Used properly, they can be a fantastic tool. It is a shame to see them retreating, because in a higher-rate environment they can deliver strong value for the right borrower.”
One of the downsides, however, is that the rates on offset are typically higher, so borrowers will need a chunk of savings to make it worthwhile.
Your linked savings also will not earn interest. If you do not maintain a meaningful balance, a standard fixed or tracker may work out cheaper overall.