Turning down interest on your savings might sound like financial madness. But those with mortgages might like to think about going down this route.

Long ago, mortgage interest attracted tax relief; but those days are sadly gone, with MIRAS relief largely disappearing in April 2000, except for those aged 65 plus, who took out loans before 1999 to purchase a life annuity.

On the other hand, income from savings is taxed at 20%, so the interest you actually receive is worth less than the headline rate. Whats more, the interest rate you pay on your mortgage is usually higher than that you receive from most interest bearing accounts. So you are probably paying a lot more on money you borrow, than you are receiving net on money you save.

But while it may therefore appear sensible to use every penny you have to reduce your mortgage, everyone needs a cash reserveto pay for unexpected expenses, or to plan for a holiday. So what is the solution; how can you minimise your mortgage repayments, while still having immediate access to your cash?

The 'offset' mortgage could well be one answer because they allow you to keep money in both savings and deposit accounts within the same overall arrangement. This gives you access to your cash, but can save money on your mortgage, making it much easier to repay the loan earlier, if you wish to.

How they work. Offset mortgages look at your current and savings accounts, each day, and deduct the total from your mortgage before interest is calculated. Naturally, this means you don't receive interest on your savings, but you pay mortgage interest on a lower balance.

Whats more, you can set your repayment level at a higher amount than the amount actually needed to cover interest and capital, each month. By doing so, your mortgage balance will reduce much faster than if you paid the 'right' amount.

Of course, with an arrangement of this sort, there can be additional benefits from managing the timing of your payments, because the longer you keep money in your current account, the more it reduces the interest you have to pay on your mortgagebecause of the daily calculation of interest. So altering your buying habits to make sure that as much as possible is purchased on your credit card and then clearing the card completely, as late as possible without incurring a penalty or interest chargecan be a real bonus. Even having your salary paid directly into your bank account, rather than by cheque, can give you a few extra days when the interest is charged on a lower mortgage balance, having been offset against cleared funds in your current account earlier. Some schemes can even include your credit card and overdrafts. But offset is not suitable for everyone. To work properly, you need to be able to maintain a credit balance in your current account and must have some savings. And you may well find that you are paying a higher interest rate than were you to choose some of the alternatives, particularly those with special offers.

Key points:

Conventional mortgages can offer good value;

Offset mortgages count savings against borrowings to keep costs down;

Offset rates can be higher, or special offers less generous;

Offset mortgages can have lower fees and fewer penalties.

Your home may be repossessed if you do not keep up the repayments on your mortgage.

Article by our finance expert Rizwan Sabbir

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