Offset Banking

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Financial institutions such as banks and building take money on deposit and pay out a low rate of interest to the depositor. They will then take that money and lend it out to people at a higher rate of interest to make a profit. So long as all the money the bank lends out is repaid with interest, the bank or building society will make a profit.

In traditional banking, saving and lending products are kept completely separate but in offset banking they can be combined in ways which could save the customer money. Offset banking allows you to use money that you have saved to reduce the amount of interest you pay on money that you have borrowed.

Let's take a simple example to see how this works. If you have a £10,000 credit card balance with a 10.0% interest rate and £2,000 of savings 2.0% interest rate, a traditional bank would pay you interest on the savings and charge you interest on the credit card:

Annual interest charged on the credit card (£10,000*10%)	=	£1,000.00
Annual interest earned on the savings (£2,000*2%)	=	£40.00
Total interest paid in a year (£1,000 - £40)	=	£960.00

Additionally, you might get taxed on the income you earn on your savings.

Because offset banking will allow you reduce your interest payments with your savings, this example would look quite different. In the same example with an offset bank account, you could put your £2,000 of savings against your credit card bill and only pay interest on the difference. Of course, you would not be earning any interest on your savings but you would still end up paying less interest every year. In the example above with offset banking, you would earn no interest on your saving but only pay £800.00 per year on your credit card (£10,000 less £2,000 = £8,000*10%).

Click here to apply for a saving account today.

NB: The above example simplifies many of the calculations to illustrate how offset banking works. For example, the interest was not compounded in the calculations and the effects of taxes on the outcomes ignored. Customers should read carefully the guidelines and restrictions of any banking product before applying.

The details published on this site are intended for information only and should not be construed as advice under the Financial Services Act 1986. You are advised to take appropriate professional and legal advice before entering into any binding contracts.

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