Offsetting your mortgage

With the base rate at 0.5 per cent for a year, offset mortgages are a tax-efficient way to squeeze more value from savings
With the base rate at 0.5 per cent for a year, offset mortgages are a tax-efficient way to squeeze more value from savings. This increasingly popular type of mortgage allows homeowners to earn savings rates of up to five per cent by using spare cash to reduce loan costs - while retaining full access to the money.

How does it work?
Offset mortgages link savings accounts, even current accounts, to a home loan. The balances from these accounts are subtracted from the mortgage amount, with loan interest only charged on the difference. While no interest is actually received on the cash balance, the return on these funds is equivalent to the mortgage rate and is tax-free.

Are they good value?
Best-buy offset tracker mortgages start at 2.59 per cent, or 3.19 per cent for fixed-rate deals. Conventional mortgages can have slightly lower rates and fees, according to broker London & Country, and for borrowers without savings an offset may not be worthwhile. But they can be particularly attractive for higher-rate taxpayers who otherwise suffer 40 per cent tax on their savings interest.

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