Offset accounts consolidate your mortgage, savings and current account into one, providing a better overall rate of interest. You may be able to factor personal loans and credit cards into the mix as well.
As the name suggests, these accounts allow people with mortgages and savings to offset one against the other, thus reducing the amount of interest charged. In effect the plus balance of your current account is offset against the sum you owe on your mortgage, thus reducing the interest charged against your mortgage loan for that month. Savers retain access to their money and when they withdraw the cash, the amount on which interest is payable increases. You can effectively earn higher rates of interest on your savings as standard variable interest rates can be a couple of per cent above savings rates. And you save on
income tax as there is none due on the savings element of this account. A higher rate taxpayer offsetting savings against a 6% mortgage is earning the equivalent of 10% on his savings. Products can be flexible, allowing you to pay down chunks off the mortgage and borrow back. This makes them suitable for self-employed individuals with less predictable cashflow.
The downside is that providers do not normally offer their best mortgage deals to offset customers, and you may often find it better to have a more keenly priced fixed rate or discount loans. After all your mortgage debt is likely to be much larger than any savings you have available to offset.
Consolidating all your accounts with one financial provider can be hard work due to the ineptitude of you current providers, or you may simply fight shy of putting so many eggs in one basket.
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