Offset Mortgages Disappearing Fast as Lenders Withdraw Deals

Offset mortgages, once a staple of the UK lending market, are rapidly vanishing as major lenders withdraw these products from sale. Last Friday, Clydesdale Bank—part of Virgin Money—removed all offset rates for new borrowers. This follows the Family Building Society dropping offset loans in March and First Direct stepping back in 2023. Scottish Widows Bank, long recognised for its offset offerings, also ceased new lending last year.

An offset mortgage links a savings account to your mortgage balance. Money deposited does not earn interest, but it is effectively offset against your outstanding loan, reducing the sum on which interest is calculated. For example, a homeowner with a £100000 mortgage and £40000 in a linked savings account would only pay interest on £60000. At a 4 per cent rate, this provides an annual saving of £1600.

Virgin Money, now under the Nationwide Building Society umbrella since September last year, has replaced its offset products with standard discounted variable rate mortgages. The best deal from Virgin Money had been a two year offset at 5.19 per cent at 80 per cent loan to value. The reduced pool of offset lenders now includes just a handful of names: Barclays, Handelsbanken, Coventry Building Society, Yorkshire Building Society and Coutts.

The appeal of offset mortgages lies in their tax efficiency. Unlike savings interest—which may be taxed beyond the personal allowance—offset savings generate a tax free return equivalent to your mortgage rate. The most competitive deal today is a two year fixed offset at 4.31 per cent from Yorkshire Building Society, with a £995 fee and maximum 60 per cent LTV.

Mortgage brokers describe offset products as particularly useful for the financially astute, allowing borrowers to pay less interest yet retain access to their capital—unlike making direct mortgage overpayments. However, banks are increasingly abandoning these loans as they prove insufficiently profitable, especially amidst stricter post crisis lending rules.

The popularity of offset deals slumped during the long era of ultra low Bank of England rates, despite peaking in April 2008 at 9700 out of every 100000 new mortgages. Even as interest rates climbed—hitting 5.25 per cent in August 2023—demand has failed to recover. In July, just 565 offset loans were taken out, a negligible 0.6 per cent of all new mortgages. Experts argue that in a higher rate environment, offset mortgages should thrive but lenders are rationalising their product lines, signalling the end of an era for this flexible borrowing tool.