How offset mortgages can save you thousands

The devastation caused by the credit crunch has made most people more savvy when it comes to money, with more of us aware of the importance of getting a decent interest rate on savings.

However, with the Bank of England base rate still at 0.5%, good interest rates have become hard to find.

Cash ISAs also fail to beat inflation with top rates of around 3%. This means that for most of us, while on paper it may look like our savings are growing, when we come to withdraw our cash it will buy less than it did when we put it in the account.

Is there any way around this?

Yes. Well, there is if you've got a mortgage. And the magical solution's name? An offset mortgage.

In a low-interest-rate environment, it's not easy to make money from your savings. But an offset mortgage might be the solution. It works by using savings to reduce the interest payable on your mortgage, thereby cutting the total amount you repay the lender.

So, if your mortgage debt is £200,000 and you have £30,000 in an account linked to your mortgage then you'll only be charged interest on £170,000 of the mortgage.

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Make your savings work harder

While savings rates are so paltry, an increasing number of people are turning to offset mortgages in order to make their money work for them.

According to First Direct, over the past two years UK offset mortgage borrowers have earned £1.4 billion more on their savings than those who placed their money in best-buy savings accounts.

Offset mortgages can be linked to your current or savings accounts. Multiple accounts can be linked, but they all have to be with the bank you have your mortgage with.

Because they are effectively mopping up some of your mortgage debt, interest is not payable on offset mortgage-linked accounts - which means you don't have to declare them on your tax return. But, importantly, your savings are still accessible.


"In these uncertain times, more of us feel comfortable with a savings cushion," says Melanie Bien, director at brokerage Private Finance. "People want to reduce their mortgage but also need to keep some savings back in case of emergency. This makes perfect sense and an offset gives the benefits of overpaying on your mortgage while retaining access to your savings."

The more you have in savings, the more you will benefit from an offset mortgage. "In an ideal world, you would have as much in savings as you owe on your mortgage, meaning you wouldn't pay interest, but could still draw on your savings," says Bien.

But while a larger savings balance will be more beneficial than a smaller one, Andy Gray, head of mortgages at Barclays, says even if you only have a small amount of savings, an offset mortgage can still work well. "A big misconception is that offset mortgages suit only a certain type of client," he says.

"These days, it's become a mainstream product which has evolved due to changing customer needs and low base rates. The product's value is in its flexibility, which reflects people's changing lifestyles and life stages.

"Consumers who benefit the most from an offset are those who have high balances moving through their current account and also have savings. But our research suggests that a customer may only need 5% of their mortgage balance in savings to achieve material benefits."

But to get the most out of the product, offset mortgage-holders need to be disciplined and run all their money through the offset accounts.

Your Comments

In theory the comment about using offset mortgages is correct but in fact it's usually a false economy to use the same provider for both the loan and the savings. Using a single provider offset mortgage you will effectively get interest on your savings element at the mortgage rate without paying tax on the interest. You will usually do much better to offset the mortgage interest yourself by choosing the lowest possible mortgage rate with provider A and the highest savings rates with providers B and C. First, you should max your savings into the best rate ISA then when that is full, pour the rest into the best rate savings account you can find. On average across the market, savings rates are higher than mortgage rates even when you factor in the tax you pay on the non-ISA savings.
The providers like to offer you offset mortgages because they make more money out of you than if your money was in one of their savings accounts.
On a day to day basis, even though my savings are less than my mortgage balance, my net savings interest is significantly more than my mortgage interest and I still keep the advantage of my loan capital being available.
Don't be fooled!

On a day to day basis, even though my savings are less than my mortgage balance, my net savings interest is significantly more than my mortgage interest and I still keep the advantage of my loan capital being available.