In return for not receiving any interest on their savings, the homeowner pays a lower rate of interest on their mortgage: an arrangement known as ‘offsetting’. An Offset mortgage is only available where both the mortgage account and the savings account/accounts are with the same provider.
On a £200,000 mortgage for example, if the homeowner offset £20,000 of their savings against their mortgage, he or she would pay interest on the outstanding balance — i.e. £180,000. As the rates of interest charged on mortgages are usually higher than those paid on savings accounts, offsetting can be more financially advantageous to the borrower.
Furthermore, homeowners can use an Offset Mortgage to either shorten the term of their mortgage, or reduce the monthly repayments. Borrowers who wish to shorten the term of their mortgage would base their monthly repayment on the full £200,000 mortgage and pay more each month than the lender requires them to. Or the homeowner could base their monthly repayment on the lower (offset) figure of £180,000, which would reduce the monthly repayment but the term of the mortgage would remain the same.
Another aspect of an Offset Mortgage relates to income tax. In addition to reducing the interest on their mortgage, the homeowner might pay less income tax simply because their savings are not earning any interest.
Apart from the money in the savings account, some providers allow borrowers to offset the cash in their current accounts and their cash ISAs against their mortgage debt. If the borrower makes withdrawals from any of the accounts that are linked to their mortgage, the amount of savings offset against their mortgage reduces.
In common with other mortgages, Offset Mortgages are available on a fixed and variable rate of interest basis, although some borrowers charge a higher rate of interest for providing an Offset Mortgage than a standard variable rate mortgage.