An offset mortgage essentially allows you to offset the money in your savings or current account against the value of your mortgage.
That does not mean you lose all your savings but instead means that by sacrificing the interest that you could have been earning on your savings, you can cut the amount of interest you need to pay on your mortgage.
In general, the best offset mortgage rates will still be significantly higher than the amount you would be receiving in interest from even the best savings accounts. For this reason, using your savings to cut the mortgage balance you need to pay interest on can be an incredibly cost efficient use of your money.
If you are a tax payer, the interest you earn on your savings in a standard current or savings account will be subject to the same rate you pay income tax.
By offsetting your savings against your mortgage you escape this tax as you are not actually earning interest on your savings, simply using them to reduce the amount of your mortgage you need to pay interest on.
For example, if you have £10,000 savings and a £100,000 mortgage, with an offset mortgage you would only be paying interest on the remaining £90,000.
This means that more of your repayments would go towards clearing your mortgage faster so you will be mortgage-free sooner.
Savings or current account mortgage?
There are so many different variations on the standard offset mortgage model, including those linked to your savings and current account mortgages that are only linked to your bank account.
The way they are structured and the exact terms and conditions differ widely, which is why a comprehensive comparison, taking into account all aspects of the agreement, is essential.
The best offset mortgages will offer you the opportunity to link your current account, savings accounts and mortgage together, so that all your finances are easily accessible in one place and you have even more flexibility to reduce your mortgage balance.
Offset mortgages are one of the most flexible mortgage options available as in addition to reducing the balance with savings as and when you choose (many providers limit overpayments) you are also likely to be able to draw on your mortgage if needs be.
This can give you access to a low interest credit facility but it does mean that you will need to be disciplined in limiting your borrowing and repaying what you have drawn if you do not want to end up in a sticky situation.
There are many different providers of deals but to find the cheapest offset mortgage it is important to compare all the options available.