Overpaying or an Offset Mortgage: What Is the Difference?
This guide is for general information only and does not provide financial advice. Check your lender’s terms before overpaying, as early repayment charges may apply. Your home may be repossessed if you do not keep up repayments on your mortgage.
Overpaying and an offset mortgage both use spare cash to reduce the interest you pay, but they treat the cash differently. An overpayment reduces your mortgage balance, and money you overpay may be hard to get back, depending on your mortgage. With an offset mortgage your savings sit in a linked account and you are charged interest only on the balance minus the savings, while the savings stay yours to use. Which suits you depends on your finances, and offset mortgages are not available from every lender.
How they work
- Overpaying: you pay extra to your lender and your balance falls by that amount. Whether and how you can take it back depends on your mortgage.
- Offset mortgage: your savings are held in an account linked to your mortgage, and the lender works out interest on your mortgage balance less those savings. You keep access to the savings, although the lender may not pay interest on them.
A worked example
In interest terms, savings left in an offset account act like an overpayment of the same size that you can take back. So the interest effect can be illustrated by a lump sum on a £200,000 balance at 4.5% with 25 years remaining, assuming the savings stay in place, your payment stays the same, that the offset and standard mortgage carry the same rate, and there are no fees or early repayment charges.
| Amount of savings or overpayment | Estimated result |
|---|---|
| £5,000 | about £9,956 of interest saved, 1 year 1 month sooner |
| £10,000 | about £19,197 of interest saved, 2 years 2 months sooner |
| £20,000 | about £35,778 of interest saved, 4 years 2 months sooner |
| £40,000 | about £62,719 of interest saved, 7 years 8 months sooner |
In this simple model the interest effect is the same, because it treats offset savings as an overpayment at the same rate that you never withdraw. In practice the result depends on the offset mortgage’s rate, how much of your savings stay in the account and for how long, what you can do with the money afterwards, and whether your lender offers an offset deal at all.
Questions worth asking
- Could you need the money at short notice? Savings in an offset account stay available; overpaid money may not.
- What rate does the offset mortgage carry compared with a standard deal you could get? Offset rates can differ from standard rates, so compare the full cost, not just the offset benefit.
- Do you have enough savings for an offset to make a difference?
- What does your lender say about overpayment allowances and any charge? See the UK mortgage overpayment cap.
Figures are estimates from this site’s calculator, using the assumptions stated above each table. They are illustrations, not forecasts. Try your own figures in the free mortgage overpayment calculator.
If you are unsure whether overpaying suits you, consider speaking to a regulated mortgage adviser. This page is general information, not advice on your circumstances.
Questions people ask
Is an offset mortgage better than overpaying?
Neither is better for everyone. In a simple model the interest effect is the same if the savings stay in place at the same rate, so the choice usually turns on access to your money, the rate each mortgage carries, and what is available to you.
Do I earn interest on savings in an offset account?
Savings in an offset account may not earn interest, because the benefit comes from reducing the interest charged on your mortgage. Check the terms of any offset mortgage you are considering.
Can I overpay an offset mortgage as well?
It depends on the lender and the deal. Check your mortgage offer or ask your lender.
Other ways to look at it
overpaying or keeping an emergency fund, overpaying or paying off other debt, overpaying before or after your fixed rate ends, what if your rate falls and you keep paying the same, overpaying with a variable income. For a first look at whether to overpay at all, see should I overpay my mortgage?