The Mortgage Finance Blog

As a follow up to our previous article about flexible mortgages, this week we’ll look at offset mortgages.

Offset mortgages share all of the benefits of a flexible mortgage, but the way in which they work is subtly different. Like flexible mortgages, offsets offer some or all of the following features.

• Make overpayments (above the normal monthly repayment)
• Make lump sum repayments (without penalty)
• To draw-down funds (to a pre-agreed maximum)
• Take a payment holiday (a break from mortgage repayments)
• Reduce the monthly payment based upon overpayments to date

Unlike a flexible mortgage, an offset mortgage has a separate account that operates much like a saving account. Unlike a savings account, money in it does not accrue interest, but instead it is used to offset the balance of your mortgage. If, for instance, you had a £100,000 mortgage and £10,000 in your offset account you would only be charged interest on the net balance of £90,000.

Like a flexible mortgage an offset mortgage can help reduce your tax bill as you are not earning money on your savings, although of course you are still seeing the benefits as you pay off your mortgage more quickly.

The real advantage of an offset account is the ease with which you can move money into or out of your offset account. The lenders which offer offset accounts provide access to them via online banking, allowing you to move money to and from your current account with ease. Additionally the majority provide a way of automating payments to help you save a regular amount every month.

The de-facto answer most advisors give is the self employed. This is clearly true as the money set aside for the personal tax bill can be used to offset the current mortgage balance. However, in the current low interest rate environment where savings are offering very poor returns, an offset mortgage can provide significant benefits for anyone who has either significant savings, or makes regular contributions to a savings account. Those that pay the upper rate of income tax at 40% will also benefit significantly as no tax is deducted due to interest not being earned. For instance, an offset account linked to a mortgage at 3.5% is equivalent to a savings rate of 5.83% gross for a 40% tax payer.