What is an offset mortgage and is it worth having?

Full answer

An offset mortgage links a savings account (and sometimes a current account) directly to your mortgage balance, so that instead of earning separate interest on your savings while paying full interest on your mortgage, the savings balance is deducted from the mortgage balance purely for interest calculation purposes, and you only pay mortgage interest on the net difference. For example, someone with a £200,000 mortgage and £30,000 held in the linked offset savings account would only be charged mortgage interest on £170,000, potentially saving a meaningful amount in interest over the mortgage term, while retaining full access to their £30,000 in savings whenever they need it, unlike simply overpaying the mortgage directly, which locks the money away (subject to the overpayment allowance and any Early Repayment Charge). The savings held in the offset account do not themselves earn any separate interest -- the 'return' comes entirely from the interest saved on the mortgage instead. This structure tends to suit higher and additional-rate taxpayers particularly well, since ordinary savings interest above the reduced £500 Personal Savings Allowance for higher-rate taxpayers (or £0 for additional-rate taxpayers) is taxed at their marginal rate, whereas the 'return' from offsetting is a straightforward reduction in mortgage interest with no equivalent Income Tax charge, making the effective after-tax benefit of offsetting often better than the equivalent taxable savings rate for these taxpayers. Offset mortgages sometimes carry a slightly higher headline interest rate than an equivalent non-offset deal, so it is worth comparing the numbers carefully, and they are most valuable for people who consistently hold a significant cash buffer rather than those with minimal savings.