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Offset your mortgage as a good alternative to poor savings rates

15th March 2010 Print

The Retail Prices Index (RPI) measure of inflation hit 3.7 per cent in January, and when combined with a historically low base rate of 0.5 per cent, this has left consumers with very few opportunities to gain any real return on their savings. For those savers who also have a mortgage, now could prove the perfect time to consider switching to an offset mortgage deal as a way of providing an alternative to poor paying savings accounts.

These types of mortgages work by offsetting consumers' savings against the debt of their mortgage. Unlike a savings account, interest is not earned on the balance of the savings pot, instead this pot is offset against the outstanding mortgage balance, with interest only accruing on the remaining balance. This means the mortgage will be paid off earlier, and the interest accrued will be significantly less. However, savers can still access their money at any time - their mortgage balance on which interest is earned will simply adjust.

For example, customers taking out a £100,000 offset loan from Woolwich at 3.49 per cent and holding £30,000 in a linked savings account, would only pay interest on the remaining £70,000, saving £11,648.51 in interest over the lifespan of the mortgage and knocking five years off the payment term. To be able to match this deal, savers would need to find a savings rate of at least 4.5 per cent for basic rate taxpayers, rising to 6 per cent for higher rates taxpayers. None of the 264 easy access savings accounts currently pays a high enough rate.

Hannah Mercedes-Skenfield, mortgage channel manager at, said:  "With rising inflation, it is becoming almost impossible to find an account which offers a real return on your savings. As a result, the advantages of an offset mortgage are becoming more attractive to borrowers who also have a decent savings pot. At times like these, when interest earned on savings after tax is potentially lower than the interest consumers pay on their debt, offsetting can be a great option. There is an additional benefit for taxpayers, as you don't earn interest on the savings, you won't be taxed on them either. This is even more of a benefit to higher rate taxpayers.

"It's worth noting however that offset deals won't necessarily be the right option for all prospective borrowers. The savings that consumers could realise will depend on the proportion of the mortgage debt they hold in savings and the rate they pay on their mortgage. Don't forget to factor in any additional costs of remortgaging as these could be high depending on the offset mortgage you choose."