Offset mortgages - please explain how they work

[Peppin]

I am wondering if an offset mortgage could be the solution to an anticipated need for flexible funding, but I don't really understand how they work. Say you have a £200,000 mortgage. You get paid £2,000 a month (these figures are hypothetical!). I understand that you have to have your salary paid into the mortgage account and then you spend from that.

But - at the moment if I get £2,000 a month, it goes in my account and I can clearly see how much of it I have left all the time. How does this work with an offset mortgage, where the mortgage balance must fluctuate from day to day with interest rate adjustments?

Also, the reason I am thinking about this is because I am considering school fees. If for example in a particular month I need access to an extra grand or two grand for school fees, can I take this out of the offset mortgage and how exactly does that work? Is it like, you can withdraw a certain percentage, or what?

Please enlighten me.

[financialwizard]

Peppin,

You are thinking of the one account where you have one account which is your mortgage, current account and savings in one.

An offset is a mortgage that you have separate savings accounts and current accounts to your mortgage. You don't get credit interest on your savings, but you don't pay debit interest on your mortgage for the amount you have in savings. So if you have a 110k mortgage and you have 33k in savings (in the linked account) you only pay interest on 77k of the mortgage, not the full 110k.

Does that make sense?

If not I will try and clarify it for you if you PM me.

[suburbandweller]

There are different types of offset mortgage, they don't all have your current account linked - mine and DH's just has a linked savings account. In our case this operates so that instead of earning interest on our savings, the amount of our savings is deducted from our mortgage balance and mortgage interest is only charged on the lower sum. This has two main benefits for us: as we are both higher rate tax payers (and have a fairly hefty mortgage), our savings work much more efficiently than if our money was just in a savings account or ISA earning minimal interest; and by keeping our mortgage repayments at a fixed level based on what we would have to pay if we had no savings to offset, we are paying down our mortgage more quickly than we would otherwise. It also means that our savings are available to us if we need them, which wouldn't necessarily be the case if we used them to pay down part of the mortgage.

I'm not sure how the current-account linked offset mortgages work but I imagine it's similar to the way I have described, just on a smaller scale, with your mortgage interest fluctuating depending on how much money is in your current account at any particular time (and it's in your interest to keep as much money in the account as possible). You can always withdraw money from your current account, but you won't have access to further mortgage funds (which I think is what you are asking in relation to school fees) without agreement from your lender.