Offset mortgages are a type of home mortgage which enables the home owner to pay less interest on the loan by keeping money in accounts held at the bank which issued it. A few different variations on this type of mortgages are available.

According to the United Kingdom’s Financial Services Authority, interest is only paid on the portion of offset mortgages which are not held in the borrower’s checking and/or savings accounts at the bank which issued the mortgage to them. For example, if the borrower takes out an offset mortgage for $80,000 and later puts $6,000 in his or her bank account, interest will only be paid on the $74,000 portion of the mortgage, as long as the money remains in the account.  A “Current Account Mortgage” is different but based upon the same general concept. The FSA also indicates that the associated bank accounts are usually held with the same lending institution, but this is not true in all instances.

The offset concept works because the bank earns revenue by lending money in the borrower’s accounts via credit cards, other home loans, auto loans, etc. and this compensates for the amount of interest the borrower is not paying on the mortgage. It also creates an incentive for the home owner to leave larger amounts of money in the account for longer periods of time, thus making it easier for the bank to lend money without running short on funds.

Wikipedia.org’s page on offset mortgages indicates that they are most common in the United Kingdom, although there have been some efforts to offer them in the United States. They are considered to be advantageous with regard to taxes in the U.K., because borrowers are effectively using interest from their accounts to pay their mortgage interest, without being taxed on intrest payments as they normally would. Wikipedia also indicates that a variation on offset mortgages is available in which interest from bank accounts is used to pay off the mortgage in addition to the home owner’s regular payments, thus allowing the mortgages to be paid off more quickly (but not at a reduced monthly cost).

Basically, offset mortgages are the same as normal home mortgages except that they use interest earned on the borrower’s bank account(s) to help make payments on the loan. This offers a convenient method of reducing monthly payments and maximizing the benefits of interest earned on money held in savings.