Mortgages UK presents the very latest information on Offset Mortgages

This is a relatively new form of mortgage launched a in the late 1990s to give prospective borrowers more flexibility. This mortgage product rewards the wealthy, higher rate taxpayers, providing they understand the fundamentals of how they work. Offset mortgages allow the mortgage lender to take into consideration your savings when calculating how much you owe each month.

Any interest you would have earned on your savings is forgone, because they are used to ease your mortgage arrears each month. However, due to savings rates being so low, once tax and inflation has been deducted, it can be cost effective to exploit your savings in this manner if you have significant savings and are a higher rate taxpayer.

For example, offset mortgages are currently charged at around 4.5 % while the top savings accounts are current paying around 4.15% gross, (2.49% after 40% tax and a negative return after taking into account inflation at 2.8%).

Any interest on your reserves is taxed at source at 20% and, if you are a higher rate taxpayer, you are legally responsible for further tax on the interest you have earned when you complete your self assessment tax return. By offsetting these savings against your mortgage, you legitimately evade tax because you are declining the interest.

With an offset mortgage the rates do not change. The payments do not fluctuate each month (unless there is a change in the mortgage rate), so providing you have substantial offset-able savings, you will effectively be overpaying each month.

However, offset mortgages are not the best solution for everyone. They are more appropriate for the higher rate taxpayer who has substantial savings and money management experience. The reason for this is the need to have at least £30,000, but preferably more, for an offset mortgage to be cost effective. Compared to traditional mortgages, offset mortgage rates tend to be much higher.

Though, mortgage lenders are concerned that borrowers are suspicious of offset mortgages. The fact that one institution is administering all the financial arrangements of the borrower they may feel that they are not getting the best possible deal for their money.

The majority of offset mortgage providers do go one step further by offering credit cards and personal loans as part of the offset arrangement. Although each account is kept separate, the money used to make the mortgage payment is used to clear your highest charging debt.

In conclusion if you do not have substantial savings we recommend that you pursue either a discounted, fixed or capped rate mortgage. This is due to their interest rates being as low as 3.1% and you could then use any interest that has been accumulated from your savings to make overpayments to your monthly figure. If you do have a significant level of savings and are in the higher rate tax bracket then an offset mortgage could work out to be the most financially effective option for you.