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An offset mortgage generally allows you to offset any credit balances you have in any eligible current and savings accounts and Cash ISA's against the mortgage balance and pay interest (at the mortgage rate) on the difference only.
This means that you could potentially reduce the total amount of interest you have to pay on the mortgage or reduce your monthly repayments. You would however forfeit any other interest on your credit balances being used to offset.
When offsetting credit balances against the mortgage, you would often have the option of maintaining the original mortgage repayments, thereby paying the mortgage off more quickly, or keep the original term and reduce the monthly repayments. Mortgage repayments may therefore vary. Either option may provide substantial savings and may be a more effective than just leaving the money in a normal deposit account with a moderate rate of interest.
The advantages extend even further if you are a higher rate taxpayer and normally pay additional interest on savings. With an offset mortgage, you could potentially cut years off your mortgage, saving thousands of pounds in interest payments or, if preferred, pay less on their monthly mortgage repayments.
Sometimes the interest rates for offset mortgages can be slightly higher than the more traditional fixed mortgage rates, tracker mortgage rates or discounted loans so it is important to take this into account when choosing a mortgage.
What type of Offset Mortgage?
The market for offset mortgages has increased over the years since these types of mortgages were introduced. With some lenders you'll be able to have fixed rate offset but they are not as common as tracker offsets. When they were first introduced into the UK, the interest rates were a lot higher than standard mortgages but they are now far more competitive. It is therefore sensible to always consider an offset mortgage where possible.
Mortgage fees have been increasing more and more in recent times as lenders try to claw back some of the savings homeowners can get by switching mortgage. Generally speaking the smaller the mortgage, the lower the fees should be. There would be little point in switching or remortgaging to a 2-year fixed rate, saving £25 per month (£600 over 2 years) if the set up fees were £1000 other than concern over future interest rates. An offset mortgage can attract higher fees than the more traditional loan so it is worth taking this into account.
Most new mortgages come with an associated redemption penalty/tie-in. Most mortgage lenders will only offer an offset mortgage if you agree to their redemption terms. Should you leave, or pay off the mortgage you would need to pay a redemption penalty. This is usually a percentage of the outstanding mortgage and will be included in your total redemption balance.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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*We do not normally charge a fee for mortgage advice, however this will be dependent on your circumstances. If a fee is charged our typical fee is £200.
As a mortgage broker, Impartial receives a fee from mortgage lenders, which is normally a small percentage of the loan we arrange. Where we arrange mortgages from £100,000 upwards we do not normally charge a fee. For mortgages under £100,000 we will charge minimum fee of £200, this fee is payable on application.