Excellent UK offset mortgage offers

Interest rates on deposits are pitifully low these days. However, there is one way you can nevertheless put your money to work: get an offset mortgage. This product links a personal savings account to your mortgage loan and offsets both of them. The objective is to reduce the amount of your mortgage on which you pay interest. By way of example, if you have a £100,000 mortgage along with £20,000 in savings held separately in paying interest on £100,000 at your mortgage rate and receive taxed interest on £20,000. However, by having an offset mortgage you give up the interest income so that you will only pay interest on the net £80,000 mortgage.

The concept is getting more popualr. Offset mortgages made up 11% of all the new mortgages sold in the second quarter of this year, according to the Council of Mortgage Lenders. That's up from 8.5% in 2008. The main reason is the low interest available on saving. The majority of individuals savings income is not going to even keep pace with inflation, after tax. So they are usually much better off using the balance in order to reduce the higher interest (in most cases) being paid on the home mortgage.

Sales of offset mortgages are also soaring as they are becoming more competitive. Not long ago the best offset mortgage rates were still 0.75%-1% higher than the top standard home loan products, claims Damian Clarkson on MSN Money. Given that gap has shrunk - typical offset mortgage rates are simply 0.1% higher.

But before you rush to set one up, be wary of the compensation rules in the case your loan provider goes bust. In the present terms of the Financial Services Compensation Scheme (FSCS), consumers with an offset mortgage loan would see all of their savings used to cancel out part of their debt. If you have a £200,000 mortgage and also £100,000 in your offset savings account, that £100,000 will be used to pay down your loan (rather than being reimbursed), leaving you with a £100,000 mortgage.

However, there is some very good news: only savings above the new £85,000 Europe-wide compensation limit will be netted off in this manner. If you take the same illustration, £85,000 of the savings would be safe, however £15,000 will be removed from your mortgage. In case your loan provider went bust, you would be still left with £85,000 in savings and a £185,000 mortgage loan. Each individual gets £85,000 of savings secured. Therefore for those who have a joint offset mortgage, only savings above £170,000 would be netted of. FirstDirect offers a two-year offset deal at 1.89% above the Bank of England rate which has a £99 fee. You will need a 35% deposit first.