Offset mortgages won't save you money

Updated on 29 October 2014 | 13 Comments

One bank reckons you could save almost £40,000 with its offset mortgages. But the numbers just don't add up.

first direct claimed recently that higher-rate taxpayers could save £37,000 with an offset mortgage. The online bank, which is part of the HSBC Group, currently offers some of the cheapest offset mortgages. So how accurate is its claim?

Making a big financial commitment? Manage your finances with Plans and view your total worth. Try Plans today for free >

What offset mortgages do

Offset mortgages allow you to combine your savings and your mortgage into one pot. You use your savings to reduce your mortgage, and therefore pay less interest. However, you can still access those savings at any time.

It can be quite intimidating to look at this big red minus balance in what's supposed to be your savings account.

This negative figure only grows bigger when you come to draw out some savings, but in some ways it's more honest than saying you've got £5,000 in savings when you've also got £150,000 in debt. It could encourage you to spend more carefully.

The main selling point of offset mortgages, though, is that higher-rate taxpayers can face 40% tax on their savings interest when they use ordinary savings accounts - but they avoid this tax if they “save” by reducing their mortgage interest.

£37,000 of savings seems incredible

Even so, I found first direct's claim of £37,000 of savings incredible.

Over the years, when I have compared offset mortgages to regular ones, they have not saved you money and you'd have been better off keeping your mortgage and savings separate.

In the past year or two, this has changed, because deals have changed. I have found that you could have made some savings with an offset if you were a higher-rate taxpayer. However, those savings didn't come close to £37,000 over the life of a mortgage.

So today I'm again looking at the best offset deal out there, and comparing it to the best non-offset mortgage used with the best easy access savings account. Let's see if first direct is on to something or not.

The best offset mortgage

first direct offers some of the cheapest offset mortgages available, possibly the cheapest, when you discard mortgages with poorer terms and conditions.

Take its best offset deal, the Base Rate Tracker Offset. With a 25% deposit, you can get an interest rate of 3.69%. This tracks the Bank of England's base rate for the life of the mortgage and comes with a £500 arrangement fee.

The best non-offset and savings account combo

The best comparable mortgage I could find that is not an offset is the HSBC Lifetime Tracker Mortgage, which has a lower interest rate of 3.29%.The mortgage comes with a £600 arrangement fee.

We need a savings account to go with it. The best easy access savings account at the moment, when considering the guarantees in its interest rate, is the ING Direct Savings Account. This currently pays 3.05%, which is 1.83% to higher-rate taxpayers.

Claim your free trial to's new financial planning application, Plans to quickly and easily track all your investments, assets, savings, and debts. Try Plans for free today >

How the two deals compare

Here's how the two deals compare after five years.

We'll assume interest rates don't change and that the same repayments are made on both mortgages. We'll also use first direct's own figures. These are that the typical mortgage for our 40% taxpayers is £183,532 and that they have cash savings of £36,706.

Position after five years

first direct offset mortgage

HSBC non-offset mortgage

Savings and savings interest earned



Outstanding debt



Net debt after five years



I've assumed valuation and legal costs are the same for both providers, and worked them in to the calculations, along with the arrangement fees.

“Net debt”, if you're wondering, is the outstanding mortgage debt after five years, minus any savings. Since the first direct offset mortgage also functions as the savings account, there is just a £0 entry in the savings and savings interest earned box.

You'll save next to nothing with an offset

This shows that offset mortgages can still be cheaper, although the difference over five years here is less than £200. In other words, your debt could be £40 lower per year with the offset mortgage.

However, if you used the non-offset mortgage and put any of your savings into an easy access cash ISA instead of an ordinary savings account, even that small £40 advantage would disappear.

Some mortgage customers might benefit more and others less from an offset, depending on personal circumstances, the type of deal you want, and your savings. But it's hard to see how anyone could save £37,000 over the life of the mortgage from these figures.

Don't forget the mortgage rate

When comparing offset mortgages, most people and banks compare the offset mortgage rate to after-tax savings rates. However, it's usually even more important to compare the mortgage rates between the best offset and best non-offset deals that you can get.

Even an apparently small difference in mortgage rates can cut into – or wipe out – the advantages of offsetting.

It's because many people forget to do both that they make large miscalculations in the savings they could make with offset deals.

Remember also that if you suddenly need to take a good chunk of your savings out of your offset mortgage, all you're left with now is a more expensive mortgage. An alternative could be to go for an ordinary mortgage, but use a portion of your large savings pot to put down a larger deposit.

If you're buying a property or renewing a mortgage, you can see how your new commitment affects your total net worth, as well as track your property's value compared to other investments. Access Plans for free today >


At, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free broker. Call 0800 804 8045 or email for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at, before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage

More on mortgages:

Seven reasons mortgage lenders turn you down

Saffron BS launches innovative 95% LTV mortgage

Why home repossessions will rise 20%

Buy-to-let landlords cashing in on rising rental yields

The cheapest and most expensive places to buy property


Be the first to comment

Do you want to comment on this article? You need to be signed in for this feature

Copyright © All rights reserved.