Why offset mortgages make sense

published 27 June 2008

"In a downturn, it's important to reduce your mortgage," says Savills' Melanie Bien. An offset mortgage can help you do so without tying up spare cash. Better yet, the effective interest rate on your savings can beat anything you'll find on the high street. An offset mortgage works by deducting your savings balance from your outstanding mortgage before working out your interest payment.

David Hollingworth of London & Country reckons offsets make sense for those with 5%-10% of their mortgage balance in savings, or those who receive regular large bonuses but need access to the money. Because most of us have a much bigger mortgage than savings balance, if you can knock "0.5% or even 1%" off the interest rate by choosing a standard loan, you should.

But right now, First Direct offers a two-year fixed offset at 5.99%, "as cheap as any ordinary offer" (the arrangement fee is £1,498, however). Offset savings effectively earn interest tax-free. So a lower-rate taxpayer gets the equivalent of 7.5% gross; a higher-rate payer gets nearly 10% (5.99/0.6). For a tracker, Bien likes the Woolwich, with a rate of 0.99 over the base rate.