Beginner's Guide To: Offset mortgages

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The Independent Online

If you have savings or regularly leave a credit balance in your current account, then an offset mortgage could be for you.

How do they work?

Offsets work by setting your savings against your borrowings. Your savings, or current account, is linked to your mortgage account and instead of earning interest on your savings you reduce the interest you pay on your debts.

For example, if you had a £100,000 mortgage and £30,000 savings you would pay interest on only £70,000 of the loan. However, your monthly payments would be unchanged because they would still be based on the full £100,000. You would be overpaying every month so you would clear your mortgage more quickly.

Offset mortgages are fully flexible. Borrowers can overpay, underpay or take payment holidays, and a drawdown facility enables them to take money out of their mortgage account.

What are other benefits?

The flexibility is a key attraction. Many standard mortgages allow you to make limited overpayments in order to clear your debt more quickly. However, with an offset you can do this without having to pay the money into the mortgage account – it remains in your linked savings account meaning you benefit from the effect of overpaying but you retain access to your savings.

There is also a tax advantage. Normally, interest on savings is liable to income tax. But with an offset, you don't earn any interest on your saving because that money effectively reduces your mortgage. This is advantageous for higher-rate taxpayers.

Is it for me?

Traditionally, the rates on offsets have been higher than those on standard mortgage deals. Therefore they tended only to offer best value to those with a significant amount in savings. However, some of the leading mortgage rates available are offsets so even those with more limited savings can benefit.

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