In today's high inflation - low savings rate world getting the most from your cash on deposit is becoming increasingly difficult. But an offset mortgage is one possible solution.
Under an offset mortgage the amount borrowed is linked to a current/savings account with the lender. The amount held in the current account is used to 'offset' the mortgage debt when calculating the interest charged on the debt. Obviously interest will not be paid on the balance held in the current/savings account, assuming it's less than your outstanding mortgage.
The attractions of an offset mortgage are obvious. For starters you pay less interest on your mortgage due to the offset from your savings (essentially getting a better interest rate on your savings). You can also save tax on your mortgage interest rate payments as well as pay off your mortgage sooner. For more information, as well as the pros and cons of having an offset mortgage, make sure you read my article 'Should you be considering an offset mortgage?'
Yet your savings might not be covered by the Financial Services Compensation Scheme (FSCS)
But one point often overlooked by borrowers is that should your bank fail then the level of protection you receive will depend on how the offset mortgage is set up. If your savings are held in a separate account from the mortgage then should your bank fail then the first £85,000 is covered under the FSCS, assuming that the banks deposits usually are. Any saving above £85,000 would be used to reduce your outstanding mortgage debt. These are know as 'Type 1' accounts.
If your mortgage and savings are held in the same account (this is know as a 'Type 2' account) then should your bank goes bust all of your savings will be used to reduce your mortgage debt and you won't receive any payment under the FSCS.
So if you have an offset mortgage, make sure you know which type of account you have and the associated level of protection before it's too late to do anything about it.
(image: by Stoonn, freedigitalphotos .net)
