Offset mortgages are a fairly new innovation in the mortgage market. Offset mortgages operate on the basis that interest accrued on savings is usually far less than the interest which is paid out on debts.
With this type of mortgage, you nominate a savings account and it is linked to the mortgage repayment.

Then the interest that would have been earned on the savings account is set aside, and the balance of the savings is applied to reduce the overall mortgage balance. Offset mortgages became popular in the UK in the late nineties. Interest rates for offset mortgages were normally less competitive than traditional mortgages.

This didn’t help to boost public opinion of them. It may be useful to note that some offset deals in the past have been unattractive because rates have tended to be set in the region of one or more per cent above competitive fixed rate deals. However, recently offset mortgages have increased in popularity due to their being quoted as a means of paying off the Offset mortgages quickly. An offset mortgage installs all your finances into one single account. It operates your current account, mortgage, savings and personal loan accounts together.

On a daily basis, it adds up all of your assets and your savings, plus the money in your current account, and offsets them against your mortgage and loans debts. The concept is that you use your savings to reduce the amount owed on your mortgage.

For example, your mortgage is £200,000; you have savings of £50,000 so you only pay interest on the difference of £150,000.
You will then avoid paying tax on the interest that your savings would have earned in a savings account, plus lenders calculate interest daily on offset mortgages. With offset mortgages, you make a monthly payment into your mortgage account as usual but your savings operate as an overpayment. Should your savings increase, the interest payable on your mortgage decreases. In order to reduce your mortgage payments, you can therefore put lump sums into your savings/current account.

Normally, offset Offset Motrgage do not penalize the borrower for repaying the mortgage early. It’s advisable to consult with an expert mortgage broker to determine whether an offset mortgage is the correct product for you. It’s not only a case of looking at your savings, but your lifestyle and future commitments. You will need to discipline yourself to get the best out of your mortgage?