Offset Mortgages: A Brief Introduction

The principle behind the offset mortgage is simple. Interest payments on savings contribute to reducing, or offsetting, the amount owing. Seven years ago there were only a handful of providers but the idea has taken root and there are now more than 40. Market analysts anticipate a further increase in the coming years.

The reason for this growth can be explained by considering the benefits of offset mortgages. In general, offset mortgages come with good competitive interest rates. These competitive rates are often attached to further flexibility in that the customer can make an over- or underpayment without incurring a penalty. However, the key benefit to those with something set aside in the bank relates to the savings that can be made on the total amount owing. This can be dramatically reduced. For example an offset customer with a combined mortgage and ISA account who has a property mortgaged to the tune of £175,000 can reduce the term of payment by 5 years and save around £80,000 in interest payments merely be paying an extra £50 a month into the combined account.

In Britain, interest generated by current account savings is taxed as income by the government and since 1983 the rate has been 20%. However since an offset mortgage works as a kind of combined account this rule does not apply. And this means big savings can be made.

Really, offset mortgages are an exciting product well suited to those who can afford to make occasional overpayments (i.e. when in receipt of an annual bonus). These are the customers who stand to gain the most from the tax incentives associated with offset mortgages. In this respect, providers of these mortgages are also actively looking to win the custom of entrepreneurs.

15.4.2008