What is an offset mortgage?
An offset mortgage links a mortgage to a borrowers’ savings, borrowers only pay interest on the net balance. Savings are offset against the total debt of the mortgage and so rather than earning interest on savings, borrowers pay less on their mortgage debt.
Offset mortgages run a borrowers current account, mortgage, savings and personal loan accounts together. On a daily basis, an offset mortgage, adds up all assets and offsets them against the debt. If a borrower has a mortgage of £100,000, savings of £10,000, and a £1,500 current account balance, rather than paying for example, 6 per cent interest on their mortgage, earning 3 per cent on their savings and 0 per cent on their current account, the offset mortgage calculates that debts are £88,500, and charges interest only on that.
Kim Rebecchi, sales and marketing director of Leeds Building Society, said: “Offsetting can save customers interest on their mortgage, enabling them to pay it off quicker and provide a higher tax efficient equivalent savings rate compared to a normal investment product."
“Savings are also kept in a completely separate account, so there is no need for a fundamental re-organisation of finances, and customers have unlimited access to them at any time, providing outstanding flexibility and excellent peace of mind.”
An offset mortgage keeps the borrowers money in virtual 'pots' meaning that it is still possible to see how much is effectively in the separate accounts. It gets money working as hard as possible and is particularly cost-effective for higher-rate taxpayers as the savings are not subject to income tax.
