Offset mortgages (sometime called Offset Banking) can save money so goes the marketing, but as ever this is not always the case and a lot of further research needs to be done. An offset mortgage is a loan where personal savings are also taken into account so as to reduce the total interest bill on the mortgage, read on.

How An Offset Mortgage Works

• You have a mortgage of £100,000 and savings or cash balances in all of your bank accounts of £20,000

• With a traditional mortgage you'd pay interest on the £100,000 and receive interest on the £20,000 cash

• But an offset mortgage combines both to give a net debt of £80,000 and it's this amount that interest is paid on

• Of course you will now receive no interest on the £20,000

• Offset mortgages are flexible so you'll still be able to drawdown on the £20,000 in savings, perhaps you want to use £2,000 to buy a car, in this case the total debt now increases to £82,000

• To sum up, any cash balances that you have (these have to be in the same bank as who the offset mortgage is held with) are offset against the mortgage loan but the savings part of the money is still available to use

• There is also a tax benefit because money used as interest on savings is subject to income tax, and this feature is particularly attractive to higher-rate tax-payers

Offset Mortgage Disadvantages

• The main disadvantage is the higher and generally uncompetitive interest rate offered on these kinds of plans

• As a rule of thumb offset mortgages are around 1% higher than other mortgage deals but this gap is slowly eroding as competition hots up

• Because of this premium on the interest rate anyone considering an offset mortgage should have large savings and those with small savings should normally consider other deals such as fixed-rate or discounted mortgages

Is An Offset Mortgage For You - A Simple Rule of Thumb

• If you have a high income and/or large savings then you should definitely consider an offset mortgage, if you're not in at least the higher-rate tax band then offset mortgages won't be competitive for your financial situation

• Because everyone's financial situation is different it's hard to give exact figures as what income/savings are needed but as a rule of thumb if your savings are at least 20% of the total mortgage loan then consider offset mortgages

• Of course, this is where you'll have to get all your figures out and run the numbers

• Also note that it may actually make better financial sense to use savings to reduce the mortgage amount in a one off payment, especially as discounted mortgages are cheaper than offset ones (be on the lookout though for sneaky redemption penalties)

• But in this situation the savings will be used up and you won't be able to draw them down for whatever reason

Who Are Offset Mortgages Best Suited

• High income earners with hefty savings

• People who have jobs that pay bumper bonuses because they normally spend the money gradually over a period of time, therefore the savings can have a great effect on reducing the monthly mortgage payments

• Self employed professionals because they tend to pay themselves twice a year and this money is usually gross

Summary

Don't believe all the marketing hype. Yes, offset mortgages can be a great financial tool and really help with reducing monthly repayments but at present they only seem to suit large money earners. And even this group would be well advised to do further research into their finances to see if an offset deal is really a benefit.

Useful Links

• Find's list of mortgage lenders