Offset mortgages explained

Rather than trying to help people with their money needs, banks, building societies and other firms spend their time trying to sell you products. There’s often little thought put into what other products you may already have – the salesmen’s job is simply to pile another one on top.

Offset mortgages are a worthy attempt to address one consequence of that – the fact that people who have both cash savings and a large mortgage are not planning their finances in the most efficient way.

Savings rates compared to mortgage rates

This isn’t a difficult concept. Traditionally, most savings accounts have paid lower rates of interest than tended to be payable on mortgage borrowing (not surprisingly, since lenders use savings to lend to customers who need a mortgage). But if you’re earning less money on your savings than you’re paying out to service your mortgage interest costs, your overall wealth is effectively going backwards.

The simplest solution is to use your savings to pay a chunk off your mortgage – and to use all future surplus cash to pay down your home loan debt as quickly as possible. But that’s an option that doesn’t suit most people. They may have particular uses in mind for their savings – or, very sensibly, feel more comfortable with a rainy day fund on which to fall back in the event of an emergency.

Offset mortgages attempt to square that circle. They require you to pool your savings in one account with your mortgage debt. You can still draw down on the money when you need to, but in the meantime every penny of savings you have is used to reduce the total value of your outstanding mortgage – the sum on which your interest payments are calculated.

Over time, thanks to the benefits of compound interest, that can have substantial benefits, enabling you to pay off your mortgage in full much earlier than expected – and at a much lower total cost of borrowing than originally envisaged.

Offset mortgages are out of favour

Still, this approach doesn’t suit everyone. For one thing, it can prove complicated keeping track of your finances. While offset mortgage providers will ensure you get information on which pool of money is savings and which is mortgage debt, many people feel happier keeping them separate.

Also, in the current low interest rate environment, with base rates at all-time loans, the argument for the offset approach is not so clear cut. The difference between mortgage and savings rates is barely discernible.

There are also other things to consider when looking for the best mortgage deal. When thinking about which mortgage type would suit you the best you may find you would prefer a tracker, discount or fixed rate mortgage deal.

Mortgage advice is important

Still, once this abnormal economic period ends, offset products may find favour once again, for the underlying principle is fine. And there are variations on the theme –some mortgages simply allow you to make very large overpayments when you have the cash, but to claw back money if you need it at a later date.

Or you could go the whole hog and combine all your ready cash with your mortgage – current account home loans take the offset concept on by adding your bank balance to the mix.

Every offset mortgage is different and it’s important to consider not only the detail of each product, but also the headline rates of interest being charged, which haven’t always been competitive. This is an area where impartial advice may prove invaluable: you can speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available member, and because they’re paid a salary – and not a sales commission – you can have confidence that you’ll receive truly impartial advice.