Offset mortgage calculator

Offset mortgages are widely advertised as a way for homeowners to pay off their debts ahead of time.

The essential principle is that you set your savings against your mortgage debt and by giving up earning interest on the former you don't pay it on the same amount of your mortgage debt.
Over a 25 year mortgage this can save you thousands and is highly tax efficient.

This calculator, sponsored by Barclays, will show you much earlier you could pay off your mortgage, or by how much you could reduce your monthly payments. 

There’s more detail on how these types of mortgage work below. 

How they work

Most mortgage borrowers also have savings, even if they are small, and using this money to cancel out mortgage debt makes sense. 

Savers avoid paying tax on interest that their deposits would otherwise have earned. And because offset mortgage lenders calculate interest daily, every pound on deposit works hard to reduce the cost of borrowing. 

Not to mention the fact that in a low interest rate environment, any savings you have are effectively earning interest at a higher rate than most mainstream savings accounts will pay.

With interest only paid on the balance between savings and mortgage debt you achieve the same effect as overpaying a homeloan: but the beauty is you can get the money back if you need it.

Current accounts, savings and offset mortgages

Some offsets allow you to link current accounts and savings balances to the mortgage, while others just use a savings pot. They can be described in different ways, but essentially both work the same.

When offset mortgages were first around rates were often substantially higher than on normal homeloans. This difference no longer has to exist and offsets from providers such as First Direct can actually beat normal mortgage rates.

Offset mortgages

In the simplest type of offset deposits are kept in separate accounts or 'pots', but linked for the purposes of interest calculation. If you put more money on deposit your balance reduces, if you withdraw it then it increases.

Current account mortgages

The first offset mortgages launched in the UK were current account mortgages (CAMs), linking a homeowner's current account with the mortgage. 

With CAMs, the bank account and mortgage were combined so customers view just one statement and see one balance. For example, if there is £2,000 in the current account and the mortgage is £80,000, the customer's balance will register £78,000 overdrawn. 

The balance is calculated daily and the homeowner pays interest only on the balance. CAMs offer the same services as an ordinary bank account. Customers can also add any savings into the CAM account to reduce the debt balance. Any other debts, such as personal loans or credit cards, can be transferred to the account. The homeowner, typically, pays the same interest rate across the lot.

The difference to repayments

With both types of offset, borrowers usually make a regular monthly repayment, though this may not be strictly necessary. For repayment mortgages, this guarantees that the mortgage will be repaid at some future point, regardless of the offset. 

Any savings above that are offset against the loan and reduce the interest charged on the mortgage. This means that the borrower is effectively overpaying on monthly repayments and effectively reducing the overall term of the mortgage. 

Within limits, offset deals also allow homeowners to draw more funds at any time without having to remortgage. And lump-sum overpayments may be made without penalty. 


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