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An offset mortgage is a mortgage where the bank combines your mortgage account with your savings account. This means that if you have savings in your current account you can automatically use these savings to pay off your mortgage, saving you potentially large sums of money in both interest and tax.

An offset mortgage works by calculating your interest payments through the amount of Mortgage owed minus savings in bank. For example if you have a mortgage of 200,000 but had 15,000 in your savings account; you would only pay interest on 185,000. In effect you would be overpaying every month. This could enable you to pay off the mortgage earlier and save on interest payments both now and in the future. Furthermore you can make additional savings through the fact you will no longer be paying interest on your savings account. For a high tax payer this could be very significant. For example if you were a high rate payer you could be paying an effective tax rate of 40% on your savings. If your savings are automatically used to pay off your mortgage you will not be paying these additional tax payments

A lending financial adviser, Intelligent Finance, has recently stated that in effect taking out an offset mortgage means that you are getting a savings rate of 11%. The logic behind their claim is that if you had an offset mortgage paying a standard variable rate of 6.5% then you save on this 6.5% plus you also save another 40% from not paying tax. In effect this means to get an equivalent deal you would need to be having a savings rate of 11%, something that is not offered by any bank at the moment.

Furthermore Offset mortgages are relatively safe. The only danger could be if you consolidate all your debts in one place and fail to make sufficient payments into your current account. Also if you are unable to leave sufficient funds in your current account then it will not be worthwhile. Typically the interest rates on Offset mortgages are higher to compensate for the increased flexibility you gain. However if you regularly have large sums in your current account then an offset mortgage could be definitely for you.

When considering an offset mortgage though it is important to not just look at the rate of interest examine other options available such as whether you can include other debts and saving accounts into the combined mortgage package.

More on Offset Mortgages

Richard Pettinger studied Politics and Economics at, Oxford University. He now works as an economics teacher in Oxford and writes frequently on UK mortgage industry and the UK housing Market. He contributes to a site: http://www.mortgageguideuk.co.uk