• Offset mortgages lower the amount of a mortgage that interest is charged
• Users will however have to give up any potential returns on their savings
• Although offset mortgages may be great for those who earn a lot, they often have higher rates

Over a million homeowners are now facing higher monthly mortgage rates when their current fixed deal ends.

An offset mortgage is a way for those who have substantial savings in the bank to potentially lower their mortgage costs.

What is an offset mortgage?

An offset mortgage is a mortgage that links your savings account or, in certain cases, your current account to your mortgage from the same bank.

The amount you pay on your mortgage is offset by the balance in your savings account and interest is calculated based on the difference.

You might have several accounts that you can draw from, depending on who you bank with.

If you have a £200,000 mortgage, and £20,000 in your linked savings, then you only will pay interest on £180,000. This could help you save thousands of interest over the loan's life.

Although the money in your savings account will not earn interest, it can reduce the interest on your mortgage. 

Your savings won't decrease over time and can be accessed at anytime.

What are the advantages of an offset mortgage?

The obvious benefit is the reduction in interest payments.

This type of mortgage is suitable for both self-employed people and those who are saving over the year to pay their taxes as a lump sum

Ultimately, if someone has surplus cash, they can use it to lower the interest they pay on mortgage repayments.

For high-income taxpayers who have large savings, an offset mortgage may be a good option. Because you're reducing your debt rather than earning interest, you don't pay tax on your savings.

It could work for someone who has raised funds for something like a home renovation project or school fees. However, the funds may not be needed immediately.  They can be used to offset the mortgage and avoid higher interest charges until funds are required.

What are the downfalls of an offset mortgage?

 An offset mortgage will often have a higher rate compared to standard mortgages and if you take out your savings you risk paying a higher rate on a larger proportion of the mortgage.  You have complete control over your savings, but your mortgage payments will be affected by what you do.

Also, keep in mind that the loan will not earn interest on savings.

If you feel that you may need to draw on the savings, you should weigh up whether a traditional mortgage is best or an offset.  A good broker can help with this.

What are the rates for offset mortgages?

The current average rate for an offset mortgage is 5.45 percent, compared to 5.32 percent rate (two year market average) and the 5% (five year average).

Customers may face issues with availability of these products however.  There are 4,372 residential mortgage products available just now, but only 78 are offset products, which is down from 88 last year.

Coventry Building Society currently offers a fixed five-year deal at 4.71 percent with a minimum deposit of 25 percent. Accord offers a similar deal for 4.77 percent with a 40% deposit.