Five Questions About: Offset mortgages

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The Independent Online

How do they work?

With an offset, your mortgage debt is set against your savings. As a result, instead of earning interest on your savings, you pay less interest on your mortgage.

For example, if you had a mortgage of £100,000 and savings of £25,000, you would only pay interest on £75,000 of your mortgage debt. In many cases your monthly mortgage payment would be based on a loan of £100,000. This means you effectively overpay every month and as a result will clear your mortgage more quickly and potentially save thousands of pounds in interest.

However, some lenders will allow you to reduce your monthly mortgage payment so that it is calculated on a £75,000 debt, rather than £100,000. If you go for this option, it won't help cut the term of your mortgage, but obviously you will benefit from lower mortgage payments.

Can account holders still access their savings?

Yes. If you have an offset mortgage, your savings are held in a separate "pot" and you can pay money in, or take it out, at any time.

Depending on the lender, you may also be able to link your current account to your mortgage as well.

What are the benefits?

Offsetting is a great way of reducing the term of your mortgage and paying less interest. However, it can also be hugely beneficial for taxpayers. Income tax is payable on savings interest, but because you don't earn any interest on savings in an offset account, there is no tax to pay.

Who are they suitable for?

In the current environment of low-interest rates and rising inflation, offset mortgages look particularly attractive. It is virtually impossible for savers to earn a positive return on their money after tax and inflation. Therefore offsetting your savings against your borrowings could be a great way for your money to work better for you.

Offsetting is most beneficial for 40 per cent and 50 per cent taxpayers because of the tax benefit.

Are there any catches?

Offsetting won't always be the best option. You need to look at the mortgage rate and consider the amount you have in savings, particularly if you are wanting a fixed rate mortgage. The most competitively priced offset deals tend to be on variable rate mortgages.

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