Offset mortgages…

did you know?

Offsetting savings or current account deposits against mortgage debt in a single, rolled-up account began in Australia decades ago.

With offset mortgages, borrowers are not credited with any interest on their savings, but don’t have to pay any interest on the equivalent amount of their outstanding mortgages.

For example, if a borrower has a £200,000 mortgage and £80,000 in savings, they will pay interest only on the difference, £120,000, enabling them to reduce the mortgage term sooner.

The principle works on the basis that most mortgage borrowers also have savings, even if they are small, and using this money to cancel out mortgage debt makes sense. Savers avoid paying tax on interest that their deposits would otherwise have earned. Lenders calculate interest daily and in this low interest rate environment, any savings you have are effectively earning interest at a higher rate than most mainstream savings accounts will pay.

This type of mortgage is particularly popular with higher-rate taxpayers, who may not be earning any interest on their savings but don’t have to pay tax on them either. However, homeowners who took out highly competitive tracker offset mortgages a year or more ago may find that they are now paying such low mortgage rates that they might be better off moving their savings to a separate account.

Advantages of offset mortgages

Benefits those who can save money, less mortgage payments.

Allows greater flexibility.

Usually interest on savings attracts a tax penalty. However, if your savings are automatically used to offset your mortgage you will not pay any tax from these savings. If you pay tax on savings at the higher rate you could save a sizable amount. This is because your savings are automatically used to offset the mortgage.

The interest on a mortgage is usually higher than a current account so this is another advantage. For example often a current account may only give you 1 per cent interest, however the interest on a mortgage may be 6 per cent. Therefore it is more efficient to use the money to reduce payments on your mortgage than it is to keep it in a low interest saving account.

Disadvantages of offset mortgages

It can be tempting to consolidate a lot of debt into one place. However in the long run this can lead to higher interest payments.

Most offset mortgages allow the borrower a certain credit limit in the beginning. If you are not disciplined about paying this back then at the end of your mortgage period you can be left with a big loan to pay.

As with all mortgages worth check all small prints about tie ins and relative rates of interest.