Offset mortgages were initially slow to take off but in recent years they have become far more popular among consumers.
An offset mortgage, in fact, links your savings to your mortgage. The amount of interest you pay on your mortgage is then worked out by deducting your saving balance away from your mortgage balance. Interest is then charged on the remainder of your mortgage balance.
The benefit of the offset arrangement is that normally interest is normally paid on your savings balance but in this case, no interest is paid this means this arrangement can be far more tax efficient. This is particularly true if you are a higher rate tax payer. This means that any saving in an offset account can in effect produce a return at the mortgage rate grossed up.
With offset mortgages, you will normally find that you have a linked savings account which is where your offset money is kept. You may also have the option of offsetting your current account balance to further reduce the interest you pay on your mortgage.
It’s important to reiterate that you will receive no interest on your savings, however, you will only pay interest on your mortgage balance after you have minus off your offset account balance.
There are a few types of people that may benefit from this type of mortgage.
Anyone who has five percent of their mortgage balance in savings. Those who are self-employed who would like to ring fence money for their tax bill. Higher rate tax payers will have a greater benefit because of the higher rate of tax they would normally pay.
Ultimately this type of mortgage will give you lower monthly mortgage repayments and still give you access to your saving if you need it. It is important to point out that not all mortgages lenders offer offset mortgages but if you look around at banks like Santander, Natwest and Woolwich this will give you a good place to start.