What is an offset mortgage?

Published:

05 July 2011

Topic:

Video,Money,Mortgages

Andrew Lea, head of sales and service at First Direct, gives his help on what an offset mortgage is and whether or not its the right mortgage for you...

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Transcript

What is an Offset mortgage?

An offset mortgage is a very simple concept in reality, and it works on the basis that for the calculation and charging of interest, any mortgage funds are offset against, for example, any savings you may hold.

So, let me give you an example to illustrate that. If you had a mortgage of a £100,000, you had a savings account with £8,000, and you had £2,000 sitting in a current account. For the purpose of calculating interest the £100,000 is offset to the £10,000 worth of savings, so in effect you only charge interest on £90,000 of your mortgage borrowing.
 
What are the benefits of offsetting your mortgage?
 
There are two main benefits, one is, for example, if you are a higher rate tax payer you are not incurring tax on any savings interest you may earn because it's been offset against your mortgage borrowing.

Secondly, because its offset and therefore you are paying interest on a slightly lower amount to your mortgage, there is more flexibility in which you can manage your finances, pay off your mortgage a little bit quicker and have more control.