Save £200 on your monthly mortgage payment!

Fancy shaving thousands of pounds off your mortgage? Or perhaps paying it off a couple of years early? John Fitzsimons looks at how you can do just that in one simple move.

I've made a few financial New Year's resolutions this year, chief among them the idea of building up a savings safety net.

However, one resolution that we should all have, New Year or not, is to pay off our mortgage as cheaply and as quickly as possible. It's the biggest debt we are ever likely to take on, so it makes sense to shift it as painlessly as possible.

And by being a little clever with your money, you can drastically cut how much you shell out on your mortgage each month, or slash years off how long the mortgage lasts.

It's time to consider an offset mortgage.

How does an offset work?

The clue really is in the name with an offset mortgage. You offset your savings against your mortgage, and reap the benefits.

Let's say you have an outstanding mortgage of £150,000. At the moment, you will be paying interest on that full amount, adding thousands of pounds - and years - to your mortgage.

But if you have a decent stash of savings, then they can be used to dramatically reduce your mortgage commitment - without having to spend them.

Say you have £15,000 in savings. Move those savings over to a savings account from your offset lender, and link them to the mortgage, and you'll only have to pay interest on the remaining £135,000. Ok, you won't get any interest on your savings, but with interest so pitiful on savings deals, that's no great loss.

And you can still get your hands on your savings at any time.

The brilliant thing about an offset is that you can then choose how you use this saving. So you opt to reduce the amount you pay in mortgage repayments each month, or keep your repayments as they were and shave years off your mortgage!

The current account version

The magic of offsetting is not just limited to the money you have set aside in savings - you can even link up your current account with certain versions!

Probably the most well known example of a current account mortgage is the One Account. You combine your salary and mortgage (and savings if you choose to) to pay the smallest amount.

The market leader

Talk of offset mortgages is particularly timely at the moment, as First Direct has recently launched a couple of market-leading offset deals which are certainly turning heads.

My favourite offset mortgage tracks 2.18% above Bank Base Rate (currently 2.68%) for the lifetime of the deal. Sadly, it is only available to those with a deposit of 35%, and will set you back £999 as an arrangement fee. There are no Early Repayment Charges (ERCs) to pay if you want to remortgage at any point.

This is a good deal if you want a lifetime tracker, and so long as you have the required deposit, should be top of your wishlist. First direct also offer a nifty fee free version which tracks Bank Base Rate plus 2.49%.

This isn't your only option, however. While you will usually need a huge deposit to get hold of an offset mortgage, there are currently deals available at 70% and 75% loan-to-value, from lenders like Woolwich and Yorkshire Bank.

How much could you save?

Let's take the example above. Jack has £150,000 left to pay off on his 25-year mortgage, at 5%, with his property worth £250,000.

As a result, he is currently shelling out around £822.77 a month in repayments.

However, if he signs up to the 2.68% first direct offset deal, those repayments can plummet to as low as £659.42 - that's a reduction of almost £200 a month!

Even better, if Jack keeps his payments at the level he is currently paying with his existing lender, the mortgage will be paid off in 18 years and 9 months - that's more than six years early! What's more, he'll save almost £30,000 on the total cost of the mortgage!

Use our offset mortgage calculator to figure out how much you could save. This is a particularly good idea if your mortgage rate is very low - say, less than 2.5% - as you may then be able to get a best-buy savings account (at around 3.15%) that pays more interest than you fork out on your mortgage, even after tax.

Your flexible (tax-free) friend

The genius of an offset mortgage is it is just so flexible. You have the power to essentially dictate how much you are going to pay towards your mortgage each month, which is one hell of a benefit.

Even better, because you aren't earning interest on those savings, you don't have to pay tax on that interest. So the savings you benefit from as a result of an offset mortgage are completely tax-free! This obvious becomes an even bigger benefit if you are a higher-rate tax payer.

So, in summary, an offset mortgage is an incredible tool if you have a decent pot of savings already set aside, and offers flexibility and potential savings unmatched by any other form of mortgage.

Get help from lovemoney.com

If you too fancy cutting the cost of your mortgage, you're in the right place - there's loads of ways lovemoney.com can help!

First off, why not try following some of the hints and tips in this goal: Cut your mortgage costs and pay off your mortgage early

Next, check out this video: How to...slash the cost of your mortgage payments

And finally, if you have some mortgage-related questions that are troubling you, be sure to pick the brains of your fellow lovemoney.com users in our Q&A section.

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