The mortgage industry, perhaps understandably given the nature of the product in question, isn’t exactly known for innovation. Therefore, new products are seen as something of an event.

When offset mortgages started to gain in popularity midway through the last decade, they were met with a lot of hype, frequently hailed as a great way to help consumers manage their money more effectively and ultimately get their mortgage paid off sooner.  As the best mortgage books will explain, the market for such mortgages has grown exponentially over the last decade. But just who do they benefit?

Interest vs Tax

Whilst, undoubtedly, offset mortgages offer a range of highly attractive benefits, whether you’re able to make the most of them will depend on your circumstances. If, as will be the case for the majority of those on the property ladder, you’re not best placed to make the most of the advantages offered by an offset mortgage, it could end an excessively costly road to go down.

The basic principle behind an offset mortgage is simple enough. Your savings are combined with your mortgage, with the funds you have saved acting to ‘offset’ the amount left outstanding on the loan, thus reducing the amount of interest you’ll have to pay. If for instance, you’ve £100,000 left to repay, put £10,000 in savings & investments, interest will only accrue on £90,000 of the loan.

The trade off for this is that your savings and investments cannot earn interest whilst being used in this way. You’re essentially foregoing interest accrued on your capital as a revenue stream in order to cancel out interest accrued by someone else’s capital as an expense.

However, the rate of interest on offset mortgages is generally comparatively high and, as a straight swap, this interest rate vs interest rate equation would almost always see you being better off with a regular mortgage. The real benefit of offsetting lies in the fact that, as your savings aren’t actually earning interest, you can’t be taxed on said earnings.

If your tax affairs are such that the interest you’d earn from your savings and share investments would push you into a higher bracket, this is a very attractive trade off, especially if, having made ownership of your property a priority you were going to put all the interest you earned towards repayments anyway. However, if your tax savings would be negligible and, like the majority of people, you’re unable to prioritise your mortgage due to other commitments, the offsetting principle makes much less sense.

Flexibility

One of the other lauded features of an offset mortgage is the level of flexibility afforded to the borrower. In most cases you’re free to make payments as and when it suits you and there are usually no penalties for early repayment.

Again, this sounds wonderful, unless you’re actually in a position to make use of this facility, its benefits will remain wholly hypothetical. If you receive your income in regular instalments, you’re unlikely to find it as useful as if you receive a large proportion of what you earn in a year at one time.

For example, if you receive a lot of your pay in the form of a large bonus, you can use the flexibility available to wait for that moment and make a big repayment. Unfortunately, most of us find that our income and expenditure is roughly the same month in month out, and would only be inconveniencing ourselves by trying to drastically vary our repayments.