Offset mortgages

Offset mortgages allow you to link your mortgage to your savings or current account, thus offsetting your mortgage against other money.

The advantage of this is that the amount of interest you are charged is reduced, which allows you to cut your mortgage term by several years. For example, if you have a mortgage of £100,000 and savings of £50,000 you will pay interest only on £50,000 of borrowing.

This sounds like a great idea, but an offset mortgage may not be suitable for everybody. Firstly, offset mortgages work best for you if you have substantial savings. You will also not receive any interest on your savings, which is something you need to be prepared for. Ideally to make this work you need savings of at least 20 per cent of your mortgage. Offset mortgages usually carry higher rates of interest, so you need to be able to make up the difference. With offsets, you can choose from fixed rates, discounts or standard variable rates.

Advantages
Despite higher interest rates, offset deals can look attractive to borrowers with large amounts of cash that they don’t want to invest elsewhere. They can mean that you pay less tax because the interest you would normally receive from savings may be subject to income tax.

Disadvantages
The main drawback is that they tend to charge around 1 per cent more than other mortgages, so you need to make sure that you can make the most of the features on offer.

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