FOOL'S EYE VIEW
Is An Offset Mortgage For You?

By Jane Mack (TMFJane)
January 13, 2004

Much as I have a fairly good awareness of personal finance issues and how to use that knowledge in my favour, generally speaking I don't like playing games with my money.

For example, last year when my husband and I wanted to make some home improvements, I decided to be a clever clogs and borrow some of the building costs on a 0% credit card. Logically, it was the cheapest way to borrow money but I found I didn't have the right temperament for it so we ended up increasing our mortgage.

As it happens I still have debt on my 0% card because our improvements cost more than anticipated (my fault for constantly changing my mind about what I wanted done) but the debt doesn't sit comfortably with me even though it's free.

One of the things I've been looking at recently is the offset mortgage. This is partly because I've realised that, between us, my husband and I have savings and current accounts with so many different companies that it's getting hard to keep track of everything and it's annoying me. An offset or current account mortgage (CAM) could be a solution to consolidating some of the paperwork that is overflowing from my filing cabinet at the moment.

Surprisingly, according to a survey carried out towards the end of last year, about half the country still isn't aware of them. CAM or offset mortgages might seem complicated but they're not really and the difference between them is minor.

For example, let's say you have a mortgage with Grabbit & Runn. They've been kind enough to lend you money so you can buy your home and, in return, you are paying them interest on what you've borrowed. Let's say you also have some savings with Little Return & Gloat who are paying you interest on the money you have kindly lent them.

If you were to look at the interest rate you are paying on your mortgage and compare it to the one you are receiving on your savings, you will probably find you're paying more than you're getting. And what's more, you're very likely to be paying tax on the interest you're getting too.

The benefit of a CAM or offset mortgage is that the savings and borrowings are merged so that the former partially cancels out the latter. So if you combine your £100,000 mortgage and your £10,000 in savings, you'll only need to pay interest on £90,000. And it's not just savings that you can set off against the mortgage. Any money in your normal day-to-day bank account can also be used. And overall, that could turn out to be a much better deal all round.

The technical difference between a CAM and an offset mortgage is generally that with a CAM, your mortgage, savings and any money you might have in your ordinary bank account all go into the same pot so your monthly statement will look like you've got a massive overdraft - which, of course, you have effectively. Offset mortgages tend to keep the mortgage, savings and bank accounts separate although they are all still linked.

The tax savings on interest paid perhaps needs further explanation and it's a particular consideration if you're a higher rate taxpayer.

Put simply (perhaps even a little simplistically), let's say your £10,000 in savings attracts a 4% annual interest rate. At the end of one year you will have gained £400 in interest on which you will have to pay £160 to the taxman (if you're a higher rate taxpayer) or £80 (if you pay at the lower rate - this usually gets deducted automatically). So, depending on your tax rate you will end the year having gained either £240 or £320 on your £10,000.

Now let's say your £10,000 is being offset against your mortgage which charges 5%. Because you're not being paid any interest on that money you obviously won't have to pay any tax on it. What you will have done instead is saved yourself £500 in mortgage interest.

Naturally, there are catches. For a start, these sorts of mortgages tend to be very flexible so it's easier to borrow money or to use them to consolidate your debts - you'll simply be increasing your 'overdraft'. That might sound good but you have to remember that you'll automatically be borrowing against your home. If you get into financial difficulties or house prices fall, your home may be at risk.

Interest rates on CAMs and offset mortgages also tend to be slightly higher than other types so you'll probably be paying a higher rate on your mortgage. But, remember, your savings will effectively attract that higher rate too so if you have a fair amount to offset and you take into account the tax considerations, this sort of mortgage could be for you. 

To return to the subject of playing games with your money, a couple of colleagues have been using their own offset mortgages to get even greater benefits.

The idea is simple. Borrow as much as you can through a 0% interest credit card deal; put those borrowings towards offsetting your mortgage for the duration of the 0% credit card deal and, at the end of it, withdraw the relevant amount and pay back the card. It's cost nothing to borrow the money but it's been used very effectively to reduce the mortgage costs.

As I said at the start, I don't have the right temperament for that sort of game and I wouldn't even contemplate it. But I can see the logic behind it if you have the confidence and the discipline to make it work.

For many people though, it might be better to shop around for a good low-rate mortgage, a high-interest savings account and putting as much of those savings as possible into a Cash ISA to avoid paying tax on the interest. That's my preference.

Find out more about Offset Mortgages; Mortgages; Cash ISAs