• Flexibility can also be a major advantage
• You can typically pay off capital without penalty, underpay and take payment holidays so long as you’ve made sufficient overpayments throughout the years.

Too good to be true – where’s the catch?

Historically borrowers have had to pay a higher interest rate for the benefit of an offset mortgage. But the good news is that with banks and building societies fighting for a bigger share of the offset market, offset interest rates are falling. This means that you need to look carefully to ensure that the apparent tax savings you could make are not eliminated by the slightly higher interest charge. Quite honestly this is not an easy calculation so it’s best left to your professional mortgage adviser. But as a guide, a standard taxpayer needs around £20,000 in savings behind a £100,000 mortgage to make the offset deal better value than a traditional mortgage. For a higher rate taxpayer the savings requirement drops to around £10,000. (These figures are based on a typical 4.69% fixed offset rate, compared with a typical 4.49% rate for a tracker.) These figures will change as interest rates vary and, in all probability, as the cost differential between an offset and a traditional mortgage closes.

Not all Offset Mortgages are the same!

• As you would expect, with the offset lenders fighting for your business lots have added bell and whistles to the basic concept
• Free property valuations and free legal work are relatively common
• Then some banks will include your current account in the offset calculation, some lenders enable two nominated savings accounts to be offset, some will even agree an additional borrowing facility with a cheque book that can be used at any time

On the interest rate front you’re bound to be offered a low starting rate fixed for six or twelve months. You might also be offered a tracker which is below the Bank of England base rate for six months and which only rises above after six months or a tracker which exactly tracks base rate plus a tiny premium for a few years. There are lots of variations. The interest rate can also depend on what percentage of the house valuation you want to borrow. For example, one lender is currently offering 5.6% if you are borrowing less than 50% rising to 6.45% for up to 99%.