An offset mortgage works in the same way as a current account mortgage, except as far as the customer is concerned, the different balances are kept separately. Some people find it easier to manage their finances if they can imagine them separately.

Although credit is offset against your mortgage balance, you will not have a permanent debit showing on your current account balance. Your current account will work in much the same way as any other, with a debit card and cheque book.

This type of account is of the most use to someone who pays the higher rate of interest on their earnings as it is a very tax efficient way of saving. It is also useful for people who want to trade up and so can use the current and savings accounts to gain the most equity in their home.

Your balances on current and savings accounts will be offset on your mortgage balance, so if you have a £150,000 mortgage and a regular balance of £2,000 in your current account with savings of £8,000, you will pay interest on £140,000.

Your monthly salary will be paid into the current account linked to the mortgage and you will be able to make any overpayments or lump sum payments towards the mortgage.

One major difference from the current account mortgage is that the three different accounts – current, mortgage and savings, are charged at different interest rates. Some lenders will charge a set rate for the credit accounts while others will find the best rates available in the market place at that time and apply those individually.

Advantages

As well as all the advantages of a flexible mortgage, an offset mortgage can also offer the following:

The more money that is in your current account above your monthly payment, the less interest you will pay on your capital loan.

It is much cheaper to borrow money from this account than to pay high interest rates on personal loans or credit and store cards.

Interest in a savings account is subject to tax, however if it is linked to your mortgage your savings will be classed as reducing the mortgage debt making it a very tax efficient option.

Disadvantages

As well as all the disadvantages of a flexible account, an offset mortgage can have the following disadvantages:

To make the current account mortgage work effectively takes a lot of budgeting and discipline.

As this is a more recent type of mortgage there are not many lenders offering it, so there is not a lot of choice in the market place.

Interest rates are different for the current account, savings and mortgage, so you do not have the opportunity to save money at the Standard Variable Rate like you do with the current account mortgage.