Are Offset Mortgages worthwhile? by Kate Tee

This question should be answered in the same way as most other questions about financial services products. When you understand what lies behind the label and realise what the product offers (i.e. just what it does), then it's a question of whether the price you pay is for something you genuinely want. Without seeming to answer the question too flippantly, therefore, the product is worthwhile if it delivers what you want at a competitive price.

What they are

First of all, then, what is an offset mortgage? The principle is really quite simple (many of them are!). The "offset" in the label refers to an ability to offset your debt balance (your outstanding mortgage) against other credit balances you may have - for example, any savings. Therefore, if you had an outstanding mortgage of, say, £150,000, but you also had savings of £15,000 an offset mortgage would let you discount one against the other so that you paid interest only on the net amount i.e. £135,000.

Offset mortgages will also offer similar benefits to so-called "flexible" mortgages, where you can pay back lump sums without incurring any penalty or take "payment holidays" if you have paid more than required during a given period (although you'll still need to take care that underpayments or payment holidays could result in an extension of the mortgage term and/or an increase in the total amount outstanding).

Offset mortgages are certainly popular. According to the Council of Mortgage Lenders, the number of offset borrowers leapt 50% in 2007 to 170,000. Their borrowing totalled £29.3bn, which represented 7% of all new lending.

Worthwhile?

There's no such thing as a free lunch, so as you'd expect, the benefits of such flexibility in repayment terms comes at a price. Interest rates for offset mortgages are usually higher than for standard mortgages. Furthermore, the rates are generally variable and will move as a reflection of the Bank of England's base rate. As we said at the beginning, it depends on whether the product is right for you and whether it fits your individual circumstances. If you've done your sums carefully, have credit balances against which to offset your mortgage repayments, and are in a position to make full use of the offset features of this type of mortgage, then studies done by lenders Barclays Bank show that holders of this type of mortgage repay the mortgage (and therefore pay less interest) on average 8 years and 8 months earlier than standard mortgage holders.

As you'll have already spotted, offset mortgages have the most to offer to people who either have significant savings or expect to save regularly in future. Such savings potential might come in the form of cash bonuses or dividends, for example. On the other hand, if your savings are likely to remain small or irregular, you could find that you are not using the offset facility as fully as possible and therefore paying an unduly high rate of interest for a feature you do not or cannot use.

So, just to recap, should you consider an offset mortgage? Remember...

* Offset mortgages might well be attractive to the self-employed, whose receipts might fluctuate from month to month * They may also be worth considering for you if there is a distinct advantage in being able to repay less during some times of the year and more during others * Do you have a lot of savings or plan to save regularly?