An offset mortgage basically uses the interest from your savings account against the interest charged on your mortgage. Usually your mortgage lender will link your mortgage and savings account into a single account, with the same financial institution. Each month, the amount you owe on your mortgage is reduced by the amount you have in your account, before working out the interest due on the mortgage. For example, if you had an offset mortgage of 100,000 and you had savings in your offset account of 25,000 you will only pay interest on 75,000. When your savings balance goes up, you pay less on your mortgage. If you continually keep your savings balance high, this could eventually result in your mortgage being paid of early. On the other hand, if your savings go down, you pay more on your mortgage. Your mortgage lender will plan with you the minimum amount you should leave in your account each month.
Offset mortgages are especially attractive for higher rate taxpayers who would otherwise be charged 40% tax on interest earnt on their savings. When the interest earnt on your savings is automatically used to offset your mortgage, you will not have to pay any tax on those...
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