Jeremy Gates looks at the nation’s money issues and advises what to do with your mortgage now inflation is falling again.

Many homebuyers have never heard of it and few ever think about getting one, but the offset mortgage is fast emerging as the best option for shrewd homebuyers.

Two or three months ago, at the start of a new year, the assumption was that growing numbers of homebuyers would switch into a fixed rate mortgage, because a rise in rates looked inevitable by mid-2011.

Now, the latest monthly figures raise the thought that inflation levels are falling back again — and with the era of rock-bottom rates possibly set to continue, offset mortgages have jumped to the fore.

Look at this glowing tribute in the May/June issue of Your Mortgage and Remortgage magazine: “Offsets are a very modern mortgage for forward-thinking borrowers who want to manage money on their own terms, not their mortgage lender’s.”

Andrew Hagger at Moneynet.co.uk sounds equally keen: “With an offset mortgage, we are not talking about saving the odd £20 or £30 here and there,” he says. “It’s a real opportunity to save thousands of pounds, just by being smarter with your money.”

Yet a new survey by Yorkshire BS reveals that only seven per cent of borrowers consider the offset option when fixing a mortgage, which means up to 10 million homebuyers could be failing to make the most of their savings.

Yorkshire BS direct mortgage manager Chris Smith says: “With one in three mortgage applications at Yorkshire being on an offset basis, we are surprised this is not mirrored through the market as a whole.

“We questioned key groups to find out why offset sales remain so low throughout the UK despite the significant financial benefits which they offer, particularly in the current market.

“We found 30 per cent of those questioned were not even aware that an offset option existed, one-third had no idea how they worked and a further third have an incorrect understanding of them.”

Several factors have conspired to make offset mortgages much more tempting than they used to be.

Hagger, and other commentators, think rock-bottom rates paid on bank and building society accounts have played a part.

Basically, offset loans link the money held in credit (like your savings and current accounts) with your debits (your mortgage).

Your mortgage might be costing an interest rate of five per cent, while your savings can struggle to earn two per cent (before tax). It almost always makes more financial sense to hold savings and a mortgage account with the same provider.

So somebody with a £150,000 mortgage and £10,000 savings only has to pay interest on the net mortgage balance of £140,000.

Here’s another clue to the rise of the offset loan: with no tax levied on savings income (because there isn’t any), offset mortgages are more attractive to higher-rate taxpayers because they avoid extra tax on savings interest.

The Government has just adjusted the tax bands to ensure that another 750,000 people have become liable to pay higher-rate tax since the start of the month; the 40 per cent rate is now payable on earnings from £42,476.

That means tens of thousands would suddenly be better off with an offset loan — if only they knew what they actually are.

Obviously many homebuyers don’t bother with offset loans because they think their savings are too small — and too variable in value — to make much difference to their mortgage costs.

They could be mistaken on that one, too.

Yorkshire BS says that savings of as little as £2,500 can shorten repayments on a £100,000 mortgage by seven months from a 25-year term, cutting total interest paid by £4,142.

Yorkshire BS also calculated that regular savings of just £25 per month could cut the mortgage repayment term by nine months, cutting the interest charged by £4,908.

The other attraction of offset mortgages is that they have become quite a bit cheaper.

Hagger says: “Four or five years ago, it was quite common to pay an extra one per cent on the mortgage interest rate for an offset loan. However, recent research by Moneynet.co.uk found the average premium on an offset is only 0.36 per cent, with some lenders — including Yorkshire BS and Britannia — charging just 0.1 per cent more than the rate for a standard mortgage.”

Barclays cut rates on its offset Woolwich range of mortgages by up to 0.50 per cent at the start of this month; on 70 per cent loan-to-value (LTV) loans, the rate falls from 2.59 to 2.48 per cent, and up to 75 per cent LTV, it drops from 2.99 to 2.59 per cent.

Laoiseach Lynch, head of mortgage products at Barclays, says: “Offset mortgages are suitable for anybody who pays tax, or has at least five per cent of their mortgage balance in savings, or is self-employed or who invests in individual savings accounts.”

Other benefits also include keeping the savings accessible at all times, as many customers don’t want to commit to a long-term bond, or a traditional mortgage where you have to overpay.

“With an offset mortgage, the money is always accessible, but it cuts the mortgage interest rate automatically.”

Another perceived problem with offset mortgages — that only a few providers make them readily available — also appears to have been largely overcome. Financial data agency Defaqto says some 28 lenders provide a total of 229 offset mortgages.