Offset Mortgage

The idea of off-setting a mortgage, or an offset in general, came into fashion some years ago, and around the year 2000 or so many banks started to offer an offset type of product. These included things such as the Barclays open plan.

So just what is an offset mortgage? Well, it is a product whereby you use your savings to help OFFSET the interest that would otherwise be payable on the mortgage. It is quite simple to understand the basic product, though all the details offered by the various providers can start to get a little confusing.

Essentially, though, you use your savings balance against the debt and the interest on it. Practically, if you have Ł10 in savings then that is Ł10 of debt that you don't have to pay interest on. Therefore the more you save the more your mortgage debt is reduced, and you don't get charged interest on the entire debt but rather that which is in excess of the savings. This means that you actually end up paying a lot less on the mortgage debt.

Overall therefore it is a trade-off: you get no interest on your savings, but you do notably reduce the total mortgage sum payable, particularly if you have healthy savings. Usually the trade off is worth it because the overall impact will be the equivalent to earning interest at better than you would have got on the savings account anyway when you take into account your overall cash position at that time.

Sometimes you can offset money that you have in your current account or any sum of money you have in addition to savings, so if you have no savings to start with but expect you will later on, then it could still be worth it if you have money in your current account, which hopefully you do at least where you are in the black and not in the red!

If you are self-employed this can be a particularly good product as you may well save during the year ready to pay the tax bill annually at the start of the year, and therefore it can help to reduce your mortgage in the process whilst it is steadily being accrued during the year. Also if you are a higher rate tax payer then you may find this is a tax-efficient way to get some benefit from those savings and save being stung at 40% of any interest that you make on it if held in a standard savings account.

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